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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  For the quarterly period ended June 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  For the transition period fromto Commission File Number: 000-50516  Eyetech Pharmaceuticals, Inc. (Exact Name of Registrant as Specified in its Charter)
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    13-4104684
(I.R.S. Employer
Identification No.)
 3 Times Square, 12th Floor
New York, New York 10036
(Address of Principal Executive Offices including Zip Code) (212) 824-3100
(Registrants Telephone Number, Including Area Code) No Change
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x The number of shares of registrants common stock outstanding on August
11, 2004 was 41,028,816.




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TABLE OF CONTENTS Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004 (unaudited)
    
    
    1Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and June 30, 2004 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and June 30, 2004 (unaudited)
    
    
    3Notes to Condensed Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits and Reports on Form 8-K
    
    
    36Signatures
    
    
    38LEASE AGREEMENTCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION




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PART I  FINANCIAL INFORMATION 
 ITEM 1. Financial Statements EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    June 30,2003
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,013,756
    
    
    $
    79,779,620Marketable securities
    
    
    106,360,073
    
    
    
    173,404,886Collaboration receivable
    
    
    2,562,000
    
    
    
    1,755,667Prepaid expenses and other current assets
    
    
    1,301,027
    
    
    
    3,812,552Total current assets
    
    
    135,236,856
    
    
    
    258,752,726Property and equipment, net
    
    
    5,867,582
    
    
    
    8,374,507Restricted cash
    
    
    5,623,865
    
    
    
    5,927,360Other assets
    
    
    2,751,375
    
    
    
    1,198,793Total assets
    
    $
    149,479,678
    
    
    $
    274,253,386LIABILITIES AND
STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    14,308,103
    
    
    $
    22,741,617Deferred revenue, current portion
    
    
    5,000,000
    
    
    
    5,295,312Capital lease obligations, current portion
    
    
    618,350
    
    
    
    648,622Deferred rent liability, current portion
    
    
    171,856
    
    
    
    534,366Total current liabilities
    
    
    20,098,309
    
    
    
    29,219,917Deferred revenue, net of current portion
    
    
    65,416,663
    
    
    
    64,688,536Capital lease obligations, net of current portion
    
    
    1,038,279
    
    
    
    706,475Other liabilities, net of current portion
    
    
    425,761
    
    
    
    2,689,729Redeemable convertible preferred stock  $.01 par
value; 29,093,695 shares authorized; 25,062,278 and
none issued and outstanding at December 31, 2003
and June 30, 2004, respectively, liquidation
preference of $252,053,310 as of December 31, 2003
    
    
    185,506,532
    
    
    
    Stockholders (deficit) equity:Convertible preferred stock  $.01 par value;
120,000 and none authorized, issued and
outstanding at December 31, 2003 and June 30,
2004, respectively; liquidation preference of
$225,000 as of December 31, 2003
    
    
    150,000
    
    
    
    Preferred stock $.01 par value; 5,000,000 shares
authorized, none issued and outstanding at
December 31, 2003 and June 30, 2004
    
    
    
    
    
    
    Common stock $.01 par value; 60,000,000 and
125,000,000 shares authorized; 4,527,736 issued
and 4,102,736 outstanding at December 31, 2003;
40,907,845 issued and 40,482,845 outstanding at
June 30, 2004
    
    
    45,277
    
    
    
    409,078Additional paid-in capital
    
    
    28,804,713
    
    
    
    374,583,058Loans to stockholders
    
    
    (430,666
    )
    
    
    (329,416
    )Deferred compensation
    
    
    (13,956,265
    )
    
    
    (12,555,514
    )Treasury stock, at cost
    
    
    (255,000
    )
    
    
    (255,000
    )Accumulated other comprehensive income (loss)
    
    
    130,831
    
    
    
    (559,265
    )Accumulated deficit
    
    
    (137,494,756
    )
    
    
    (184,344,211
    )Total stockholders (deficit) equity
    
    
    (123,005,866
    )
    
    
    176,948,730Total liabilities and stockholders (deficit) equity
    
    $
    149,479,678
    
    
    $
    274,253,386
 See accompanying notes. 1




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EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2004
    
    2003
    
    2004(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Collaboration revenue:License fees
    
    $
    1,250,000
    
    
    $
    1,250,000
    
    
    $
    2,083,335
    
    
    $
    2,500,002Reimbursement of development
costs
    
    
    9,948,757
    
    
    
    11,299,799
    
    
    
    16,424,586
    
    
    
    21,762,397Total collaboration revenue
    
    
    11,198,757
    
    
    
    12,549,799
    
    
    
    18,507,921
    
    
    
    24,262,399Operating expenses:Research and development
    
    
    19,721,332
    
    
    
    33,913,567
    
    
    
    31,337,975
    
    
    
    55,844,459Sales and marketing
    
    
    742,908
    
    
    
    6,177,681
    
    
    
    1,311,351
    
    
    
    9,976,910General and administrative
    
    
    342,287
    
    
    
    4,319,503
    
    
    
    1,445,433
    
    
    
    5,962,164Total operating expenses
    
    
    20,806,527
    
    
    
    44,410,751
    
    
    
    34,094,759
    
    
    
    71,783,533Loss from operations
    
    
    (9,607,770
    )
    
    
    (31,860,952
    )
    
    
    (15,586,838
    )
    
    
    (47,521,134
    )Interest income
    
    
    579,383
    
    
    
    877,110
    
    
    
    1,197,859
    
    
    
    1,571,818Interest expense
    
    
    (43,402
    )
    
    
    (37,856
    )
    
    
    (104,982
    )
    
    
    (84,127
    )Net loss
    
    
    (9,071,789
    )
    
    
    (31,021,698
    )
    
    
    (14,493,961
    )
    
    
    (46,033,443
    )Preferred stock accretion
    
    
    (2,258,964
    )
    
    
    
    
    
    
    (4,517,927
    )
    
    
    (816,012
    )Net loss attributable to
common stockholders
    
    $
    (11,330,753
    )
    
    $
    (31,021,698
    )
    
    $
    (19,011,888
    )
    
    $
    (46,849,455
    )Basic and diluted net loss
attributable to common
stockholders per share
    
    $
    (2.88
    )
    
    $
    (0.77
    )
    
    $
    (4.94
    )
    
    $
    (1.38
    )Weighted average shares
outstanding  basic and
diluted
    
    
    3,932,489
    
    
    
    40,389,385
    
    
    
    3,847,117
    
    
    
    33,959,624Pro forma basic and diluted
net loss attributable to
common stockholders per
share
    
    $
    (0.40
    )
    
    $
    (0.77
    )
    
    $
    (0.69
    )
    
    $
    (1.23
    )Weighted average shares
outstanding  pro forma
basic and diluted
    
    
    28,072,746
    
    
    
    40,389,385
    
    
    
    27,471,315
    
    
    
    38,122,678
 See accompanying notes. 2




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EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30,2003
    
    2004(Unaudited)
    
    (Unaudited)Operating activitiesNet loss
    
    $
    (14,493,961
    )
    
    $
    (46,033,443
    )Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:Depreciation and amortization
    
    
    398,572
    
    
    
    863,224Loss on disposal of assets
    
    
    19,627
    
    
    
    153,265Noncash stock-based compensation
    
    
    990,635
    
    
    
    4,923,205(Gain) loss on sale of marketable securities
    
    
    (31,957
    )
    
    
    32,245Changes in operating assets and liabilities:Collaboration receivable
    
    
    (15,346,757
    )
    
    
    806,333Prepaid expenses and other current assets
    
    
    141,100
    
    
    
    (2,018,773
    )Other assets
    
    
    (503,613
    )
    
    
    (148,642
    )Accounts payable and accrued expenses
    
    
    1,468,833
    
    
    
    8,934,478Deferred revenue
    
    
    72,916,665
    
    
    
    (432,815
    )Other liabilities
    
    
    (84,788
    )
    
    
    2,626,477Net cash provided by (used in) operating activities
    
    
    45,474,356
    
    
    
    (30,294,446
    )Investing activitiesPurchases of property and equipment
    
    
    (1,427,270
    )
    
    
    (3,523,414
    )Purchase of marketable securities
    
    
    (186,729,577
    )
    
    
    (2,302,663,404
    )Proceeds from sale of marketable securities
    
    
    155,498,841
    
    
    
    2,234,896,250Increase in restricted cash
    
    
    
    
    
    
    (303,495
    )Repayment of loan to stockholders
    
    
    750
    
    
    
    101,250Increase in prepaid expenses and other current assets
    
    
    (278,239
    )
    
    
    (492,752
    )Net cash (used in) investing activities
    
    
    (32,935,495
    )
    
    
    (71,985,565
    )Financing activitiesProceeds from issuance of common stock, net
    
    
    122,233
    
    
    
    154,706,980Proceeds from issuance of redeemable convertible preferred stock and warrants, net
    
    
    24,736,944
    
    
    
    2,640,427Repayment of capital lease obligations
    
    
    (273,142
    )
    
    
    (301,532
    )Net cash provided by financing activities
    
    
    24,586,035
    
    
    
    157,045,875Net increase in cash and cash equivalents
    
    
    37,124,896
    
    
    
    54,765,864Cash and cash equivalents at beginning of period
    
    
    5,791,845
    
    
    
    25,013,756Cash and cash equivalents at end of period
    
    $
    42,916,741
    
    
    $
    79,779,620Noncash financing and investing activitiesLoans to stockholders in connection with exercise of stock options and stock
purchase
    
    $
    34,416
    
    
    $
    Supplemental disclosures of cash flow informationCash paid during the period for:Interest
    
    $
    104,982
    
    
    $
    37,856Issuance of redeemable preferred stock on conditional exercise of warrants
    
    $
    
    
    
    $
    500,964Conversion of redeemable and convertible preferred stock to common stock
    
    $
    
    
    
    $
    189,613,935Costs in connection with initial public
offering of common stock reclassified to additional paid in capital
    
    $
    
    
    
    $
    1,701,223
 See accompanying notes. 3




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EYETECH PHARMACEUTICALS, INC. 
 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004
 1. Organization and Description of Business Eyetech Pharmaceuticals, Inc., together with its wholly owned subsidiary
(Eyetech or the Company), is a biopharmaceutical company that specializes
in the development and commercialization of novel therapeutics to treat
diseases of the eye. The Companys initial focus is on diseases affecting the
back of the eye, particularly the retina. The Companys most advanced product
candidate is MacugenTM (pegaptanib sodium injection), which it is developing in
a collaboration with Pfizer Inc. (Pfizer) for the treatment of both the wet
form of age-related macular degeneration, known as AMD, and for the treatment
of diabetic macular edema, known as DME, which is a complication of diabetic
retinopathy. In the second half of 2001, the Company initiated two Phase 2/3
pivotal clinical trials of Macugen for the treatment of wet AMD. Based on the
results from the first year of these trials, the Company has filed a new drug
application with the United States Food and Drug Administration seeking
marketing approval of Macugen for the treatment of wet AMD. The Company is also
currently conducting a Phase 2 clinical trial for the use of Macugen in the
treatment of DME. The Company formed a wholly owned subsidiary in Ireland in 2002. There has been
no activity in this company since inception in 2002. The Company operates in a
single business segment. Prior to February 2003, the Company operated as a development-stage company and
did not generate any revenue. Effective February 2003, the Company exited the
development stage when its several concurrent agreements with Pfizer became
effective. On February 4, 2004, the Company successfully completed an initial public
offering of its common stock. The initial public offering consisted of the sale
of 6,500,000 shares of common stock at a price of $21.00 per share. As part of
the offering, the Company granted to the underwriters an option to purchase an
additional 975,000 shares within 30 days of the initial public offering to
cover over-allotments. This option was exercised in full in February 2004. Net
proceeds from the initial public offering after deducting underwriters
discounts and expenses were $142.9 million, including the exercise of the
over-allotment option. In addition, 476,190 shares of common stock were
purchased concurrently with the initial public offering by Pfizer for $10
million as part of its commitment under Pfizers collaboration with the
Company. The Company issued 5,073,435 warrants in connection with original issuances of
preferred stock from April 2000 to August 2002 and the in-licensing of Macugen
in April 2000. Prior to the closing of our initial public offering, 1,511,381
shares of preferred stock were issued in connection with warrant exercises
providing $10.4 million in aggregate proceeds. Included in this amount were
73,581 shares issued pursuant to conditional exercises received during the
quarter ended December 31, 2003 for proceeds of $0.5 million. An additional
1,867,124 shares of preferred stock were issued on a cashless basis to the
holders of 2,728,721 preferred stock warrants, who surrendered 861,597
preferred stock warrants as payment for those shares. All outstanding shares of
preferred stock, including those shares issued in connection with warrant
exercises, were automatically converted to an equivalent number of shares of
common stock upon the closing of our initial public offering. Additionally,
warrants to purchase 833,333 shares of Series B preferred stock converted to an
equal number of warrants to purchase an equal number of shares of common stock
upon the closing of the initial public offering. These warrants were exercised
during the quarter ended March 31, 2004 on a cashless basis, resulting in the
issuance of 680,509 shares of common stock in exchange for the surrender of
warrants to purchase 152,824 shares of common stock. No warrants are
outstanding at June 30, 2004. On June 2, 2004, the Company successfully completed a secondary public offering
of its common stock. The secondary public offering consisted of the sale of
3,860,000 shares of common stock at a price of $38.50 per share. As part of the
offering, the selling stockholders granted to the underwriters an option to
purchase an additional 579,000 shares within 30 days of the secondary public
offering to cover over-allotments. This option was exercised in full in June
2004. All shares sold were offered by existing stockholders and employees
holding options. Shares 4




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outstanding increased by 106,735 shares after the offering as a result of
option exercises, which provided proceeds to the Company of $0.1 million. The
costs associated with the offering, excluding underwriters discounts and
commissions payable by the selling stockholders, were approximately $1.0
million and have been paid by the Company. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all the information and footnotes
required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments considered necessary for a fair presentation
of the Companys financial position, results of operations, and cash flows for
the periods presented. The results of operations for the three-month and six month periods ended June
30, 2004 are not necessarily indicative of the results that may be expected for
the entire fiscal year ending December 31, 2004. These condensed consolidated
financial statements should be read in conjunction with the audited financial
statements included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission. Use of Estimates The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Reclassification Certain reclassifications have been made to the prior years information to
conform to the 2004 presentation. Cash Equivalents The Company considers all highly-liquid investments with an original maturity
of three months or less to be cash equivalents. At June 30, 2004, the Company
had substantially all of its cash and cash equivalents in investment grade
obligations. Marketable Securities Marketable securities are classified as available-for-sale and are carried at
market value with unrealized gains and losses reported as other comprehensive
income or loss, which is a separate component of stockholders (deficit)
equity. Restricted Cash Restricted cash collateralizes outstanding letters of credit associated with
the leases of the Companys office and laboratory facilities. The funds are
invested in certificates of deposit. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash equivalents and marketable securities. The
Company has established guidelines relating to diversification and maturities
that allow the Company to manage risk. 5




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Revenue Recognition Revenues associated with the Companys collaboration with Pfizer consist of
non-refundable, license payments, reimbursement of development expenses and
costs associated with the validation of the manufacturing process. The Company
expects to record revenues and expenses in future periods related to equipment
purchased which, under the terms of our agreement, Pfizer will reimburse to the
Company a portion of the total cost of the equipment which will be recognized
over the life of the equipment. The Company uses revenue recognition criteria outlined in Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, and Emerging
Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). Accordingly, revenues from licensing agreements
are recognized based on the performance requirements of the agreement.
Non-refundable license payments, where the Company has an ongoing involvement
or performance obligation, are generally recorded as deferred revenue in the
balance sheet and amortized into license fees in the statement of operations
over the term of the performance obligation. Revenues derived from reimbursements of costs associated with the development
of Macugen are recorded in compliance with EITF Issue 99-19, Reporting Revenue
Gross as a Principal Versus Net as an Agent (EITF 99-19), and EITF Issue
01-14, Income Statement Characterization of Reimbursements Received For
Out-of-Pocket Expenses Incurred (EITF 01-14). According to the criteria
established by these EITF Issues, in transactions where the Company acts as a
principal, with discretion to choose suppliers, bears credit risk and performs
part of the services required in the transaction, the Company has met the
criteria to record revenue for the gross amount of the reimbursements. Research and Development Costs Research and development costs are expensed as incurred. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123 (SFAS 148). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation from the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). In addition, SFAS 148 amends the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). The Company adopted the disclosure requirements of SFAS 148 effective
December 31, 2002. As allowed by SFAS 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting prescribed in APB 25
and, accordingly, does not recognize compensation expense for stock option
grants made at an exercise price equal to or in excess of the fair market value
of the stock at the date of grant. Had compensation cost for the Companys outstanding employee stock options been
determined based on the fair value at the grant dates for those options
consistent with SFAS 123, the Companys net loss and basic and diluted net loss
per share, would have been changed to the following pro forma amounts: 6




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Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2004
    
    2003
    
    2004Net loss attributable
to common
stockholders, as
reported
    
    $
    (11,330,753
    )
    
    $
    (31,021,698
    )
    
    $
    (19,011,888
    )
    
    $
    (46,849,455
    )Add: Non-cash employee
compensation as
reported
    
    
    142,918
    
    
    
    1,648,611
    
    
    
    285,836
    
    
    
    2,790,139Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards
    
    
    (209,867
    )
    
    
    (2,759,308
    )
    
    
    (376,344
    )
    
    
    (4,539,096
    )SFAS 123 pro forma loss
    
    $
    (11,397,702
    )
    
    $
    (32,132,395
    )
    
    $
    (19,102,396
    )
    
    $
    (48,598,412
    )Basic and diluted loss
attributable to common
stockholders per
share, as reported
    
    $
    (2.88
    )
    
    $
    (0.77
    )
    
    $
    (4.94
    )
    
    $
    (1.38
    )Basic and diluted loss
attributable to common
stockholders per
share, SFAS 123 pro
forma
    
    $
    (2.90
    )
    
    $
    (0.80
    )
    
    $
    (4.97
    )
    
    $
    (1.43
    )
 SFAS 123 pro forma information regarding net loss is required by SFAS 123, and
has been determined as if the Company had accounted for its stock-based
employee compensation under the fair value method prescribed in SFAS 123. The
fair value of the options prior to completion of the Companys initial public
offering was estimated at the date of grant using the minimum value pricing
model. Upon completion of the initial public offering in February, 2004, the
Company began using the Black-Scholes model to estimate fair value. The
following assumptions were utilized for the calculations during each period: Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2004
    
    2003
    
    2004Risk-free interest rate
    
    
    2.8%  2.87
    %
    
    
    3.8% - 4.75
    
    
    
    2.8%  2.87
    %
    
    
    3.9% - 4.75Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life
    
    7 years
    
    5 years
    
    7 years
    
    5 yearsVolatility
    
    
    N/A
    
    
    
    76
    %
    
    
    N/A
    
    
    
    74
    %
 The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Pro forma compensation related to stock option
grants is expensed over their respective vesting periods. The Company accounts for options issued to nonemployees under SFAS 123 and EITF
Issue 96-18 Accounting for Equity Investments that are Issued to Other than
Employees for Acquiring or in Conjunction with Selling Goods or 7




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Services
(EITF 96-18). As such, the value of such unvested options is periodically
remeasured and income or expense is recognized during their vesting terms. Income Taxes The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance is
provided when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. Recently Issued Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities SFAS No. 146). This standard addresses
financial accounting and reporting for costs associated with an exit or
disposal activities and requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This standard nullifies EITF Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring. This Standard is effective for exit or disposal activities
initiated after December 31, 2002. Adoption of this statement resulted in the
recognition of a loss of $1.5 million during the quarter ended June 30, 2004.
The loss was incurred because the Company has not subleased its previous
corporate offices at 500 Seventh Avenue in New York City and office equipment
associated with that facility. During 2003, the FASB issued various accounting standards and interpretations,
including SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150), Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, an
interpretation of ARB 51 and Interpretation No. 46-R Consolidation of
Variable Interest Entities (FIN 46-R). Adoption of these standards and
interpretations has not had a material effect on the Companys financial
condition, results of operations or liquidity. There have been no other
accounting pronouncements made through June 30, 2004 that the Company expects
would have a material effect on its results of operations, cash flows or
financial position. 3. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share (SFAS No. 128). Under the provisions of SFAS No. 128,
basic net loss per common share (Basic EPS) is computed by dividing net loss
by the weighted-average number of common shares outstanding. Diluted net loss
per common share (Diluted EPS) is computed by dividing net loss by the
weighted-average number of common shares and dilutive common share equivalents
then outstanding. Common equivalent shares consist of the incremental common
shares issuable upon the conversion of preferred stock, shares issuable upon
the exercise of stock options and the conversion of preferred stock upon the
exercise of warrants. Diluted EPS is identical to Basic EPS since common
equivalent shares are excluded from the calculation, as their effect is
anti-dilutive. 8




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The following table sets forth the computation of basic and diluted net
loss per share for the three-month and six-month periods ended June 30, 2003
and 2004: Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2004
    
    2003
    
    2004Numerator:Net Loss
    
    $
    (9,071,789
    )
    
    $
    (31,021,698
    )
    
    $
    (14,493,961
    )
    
    $
    (46,033,443
    )Preferred stock accretion
    
    
    (2,258,964
    )
    
    
    
    
    
    
    (4,517,927
    )
    
    
    (816,012
    )Numerator for basic and
diluted net loss
attributable to common
stockholders per share 
net loss attributable to
common stockholders
    
    $
    (11,330,753
    )
    
    $
    (31,021,698
    )
    
    $
    (19,011,888
    )
    
    $
    (46,849,455
    )Denominator:Denominator for basic
and dilutive net loss
attributable to common
stockholders per share 
weighted-average shares
    
    
    3,932,489
    
    
    
    40,389,385
    
    
    
    3,847,117
    
    
    
    33,959,624Basic and diluted net
loss attributable to
common stockholders per
share
    
    $
    (2.88
    )
    
    $
    (0.77
    )
    
    $
    (4.94
    )
    
    $
    (1.38
    )Denominator for
unaudited pro forma
basic and diluted net
loss attributable to
common stockholders per
share  weighted average
shares
    
    
    28,072,746
    
    
    
    40,389,385
    
    
    
    27,471,315
    
    
    
    38,122,678Unaudited pro forma
basic and diluted net
loss attributable to
common stockholders per
share
    
    $
    (0.40
    )
    
    $
    (0.77
    )
    
    $
    (0.69
    )
    
    $
    (1.23
    )
 Pro forma basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding, including the pro forma effects of
the automatic conversion of all outstanding convertible preferred stock into
shares of the Companys common stock effective upon the closing of the
Companys initial public offering, as if such conversion had occurred at the
date of the original issuance. Accordingly, pro forma basic and diluted net
loss per common share has been calculated assuming the preferred stock was
converted as of the original date of issuance of the preferred stock. The following table shows dilutive common share equivalents outstanding on a
weighted average basis, which are not included in the above historical
calculations, as the effect of their inclusion is anti-dilutive during each
period: Three Months Ended June 30,
    
    Six Months Ended June 30,2003
    
    2004
    
    2003
    
    2004Preferred Stock
    
    
    24,140,257
    
    
    
    
    
    
    
    22,499,432
    
    
    
    4,163,054Options
    
    
    3,627,195
    
    
    
    6,064,574
    
    
    
    3,553,000
    
    
    
    6,064,574Warrants
    
    
    5,073,435
    
    
    
    
    
    
    
    5,073,435
    
    
    
    922,76132,840,887
    
    
    
    6,064,574
    
    
    
    31,125,867
    
    
    
    11,150,389
 4. Comprehensive Loss Comprehensive losses are primarily comprised of net losses and unrealized gains
and losses on available for sales securities. Comprehensive losses for the six
months ended June 30, 2003 and 2004 are detailed below. 9




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For the six months endedJune 30, 2003
    
    June 30, 2004Net loss
    
    $
    (14,493,961
    )
    
    $
    (46,033,443
    )Unrealized gain (loss) on available for sale securities
    
    
    5,051
    
    
    
    (690,096
    )Comprehensive loss
    
    $
    (14,488,911
    )
    
    $
    (46,723,539
    )
 5. Pfizer Collaboration In December 2002, Pfizer and the Company entered into several concurrent
agreements to jointly develop and commercialize Macugen. Under the terms of the
agreement, which became effective February 3, 2003 when government approval was
obtained, Pfizer made initial payments of $100 million, which included the
purchase of 2,747,253 shares of the Companys Series D preferred stock for
$24.7 million, net of issuance costs and a $75 million initial license fee
which is being amortized over the expected term of the agreement (estimated at
15 years). In addition, the Company agreed to sell to Pfizer and Pfizer agreed
to purchase from the Company, up to an additional $25 million of the Companys
capital stock at the then current market price upon the completion of certain
events. Pursuant to this agreement, concurrent with the initial public
offering, Pfizer purchased 476,190 shares of common stock at $21.00 per share,
resulting in gross proceeds to the Company of approximately $10 million. Under the terms of the agreement, both parties will expend funds related to the
co-promotion and development of Macugen. Pfizer will generally fund a majority
of the ongoing development costs incurred pursuant to an agreed upon
development plan covering the development of Macugen for AMD, DME, retinal vein
occlusion and other agreed upon ophthalmic indications. In certain instances,
the Company will reimburse Pfizer for the Companys share of costs that Pfizer
incurs. This funding resulted in the recognition by the Company of $11.2
million in revenue during the three month period ended June 30, 2003 and $12.5
million in revenue and $1.8 million in research and development and marketing
expenses during the three month period ended June 30, 2004. The Company
recognized $16.4 million in revenue for the six month period ending June 30,
2003 and $21.8 million in revenue and $2.5 million in research and development
and marketing expenses during the six month period ending June 30, 2004. At
June 30, 2004, the Company has recorded a collaboration receivable in the
amount of $1.8 million. In addition, the Company recognized $1.3 million in
connection with the amortization of the $75 million initial license fee paid by
Pfizer for the three month periods ending June 30, 2003 and 2004, respectively,
and $2.1 million and $2.5 million for the six month periods ended June 30, 2003
and 2004, respectively. 10




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations You should read the following discussion and analysis of our financial
condition and results of operations together with our condensed consolidated
financial statements and the related notes appearing elsewhere in this report.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and
strategy for our business and related financing, includes forward-looking
statements that involve risks and uncertainties. You should review the Risk
Factors that May Affect Results section of this report for a discussion of
important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in
the following discussion and analysis. Overview We are a biotechnology company with our first product candidate, Macugen,
currently in two Phase 2/3 pivotal clinical trials for use in the treatment of
the wet form of age-related macular degeneration, known as AMD. Based on the
results from the first year of these ongoing Phase 2/3 pivotal clinical trials,
we and Pfizer have filed a new drug application with the FDA as a rolling
submission to seek marketing approval for Macugen in the treatment of wet AMD.
We are seeking marketing approval for the use of Macugen in the treatment of
all angiographic subtypes of active subfoveal neovascular AMD, which represents
the same broad patient population we studied in our clinical trials. Macugen
is also in a Phase 2 clinical trial for use in the treatment of diabetic
macular edema, known as DME. Our revenues for the six months and the quarter
ended June 30, 2004 were $24.3 million and $12.6 million, respectively,
consisting of amortization of the initial non-refundable, license payment that
we received from Pfizer under our collaboration with Pfizer and reimbursement
to us by Pfizer of a portion of the ongoing development costs for Macugen. As a
result of our collaboration with Pfizer, we ceased to be a development-stage
company in February 2003. We have had no other income since inception other
than interest on short-term investments. We commenced operations in April 2000. Since our inception, we have
generated significant losses. As of June 30, 2004, we had an accumulated
deficit of $184.3 million. We expect to continue to spend significant amounts
on the development of Macugen and our other programs. We expect to incur
significantly greater commercialization costs as we continue to prepare for the
anticipated commercial launch of Macugen. We expect to begin to participate in
selling activities, or detailing, of Pfizers product, Xalatan®, for the
treatment of glaucoma together with Pfizer three to six months prior to our
planned commercial launch of Macugen. We also plan to continue to invest in
research for additional applications of Macugen and to develop new drugs and
drug delivery technologies and to build the appropriate infrastructure to
support our business. We have recently entered into a lease for new research
and development space that will increase our annual facilities expenses by $1.6
million. Additionally, we plan to continue to evaluate possible acquisitions
or licenses of rights to potential new drugs, drug targets and drug delivery
technologies that would fit within our growth strategy. Accordingly, we will
need to generate significant revenues to achieve and then maintain
profitability. Most of our expenditures to date have been for research and development
activities and general and administrative expenses. Research and development
expenses represent costs incurred for product acquisition, clinical trials and
activities relating to regulatory filings and manufacturing development
efforts. We outsource our foreign clinical trials and our global manufacturing
development activities to third parties to maximize efficiency and minimize our
internal overhead. We expense our research and development costs as they are
incurred. Our research and development expenses incurred through June 30, 2004 were
expenses related primarily to the development of Macugen. We expect to incur
additional research and development expenses of approximately $8 million to $18
million relating to Macugen prior to its commercial launch in the United States
for use in the treatment of wet AMD. These additional expenses are subject to
the risks and uncertainties associated with clinical trials and the United
States Food and Drug Administration, or FDA, and foreign regulatory review and
approval process. As a result, these additional expenses could exceed our
estimated amounts, possibly materially. Under our agreements with Pfizer,
Pfizer is obligated to fund specified percentages of the ongoing development
costs incurred pursuant to an agreed upon development plan. Sales and marketing and general and administrative expenses
consist primarily of salaries and related expenses, 11




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general corporate activities and
costs associated with building a commercial infrastructure to market and sell
Macugen and to detail Xalatan. We anticipate that general and administrative
expenses will increase as a result of the expected expansion of our operations,
facilities and other activities associated with the planned expansion of our
business, together with the additional costs associated with operating as a
public company. We expect sales and marketing expenses to increase as we ready
our sales force, plan and implement our marketing programs to support detailing
Xalatan and to prepare to sell Macugen, subject to receiving required
regulatory approvals. For the year ended December 31, 2003, license fees paid to us by Pfizer
resulted in current taxable income to us. Net operating losses available to
offset future taxable income for federal income tax purposes were approximately
$43.3 million as of December 31, 2003. If not utilized, federal net operating
loss carry-forwards will begin to expire in 2020. To date, we have not
recognized the potential tax benefit of our net operating losses on our balance
sheets or statements of operations. The future utilization of our net operating
loss carryforwards may be limited based upon changes in ownership pursuant to
regulations promulgated under the Internal Revenue Code. Critical Accounting Policies and Significant Judgments and Estimates Our managements discussion and analysis of our financial condition and
results of operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported revenues and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates
and judgments related to revenue recognition. We base our estimates on
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note
2 to our consolidated financial statements appearing in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003 filed with the
Securities and Exchange Commission, we believe that the following accounting
policies relating to revenue recognition and stock-based compensation charges
are most critical to aid you in fully understanding and evaluating our reported

financial results. Revenue Recognition In connection with our collaboration with Pfizer, we recognize revenue
from non-refundable license payments ratably over the remaining term of the
agreements with Pfizer, commencing when contractual obligations have been
satisfied and such payments have been made. When the period of deferral over
which we recognize the revenue cannot be specifically identified from the
agreement, our management estimates the period based upon other critical
factors contained within the agreement. We continually review these estimates,
which could result in a change in the deferral period and which might impact
the timing and the amount of revenue recognized. To date, we have received $75
million as an initial license fee from Pfizer. We will amortize this initial
license fee over 15 years, the effective life of the agreement. In addition,
under the terms of our agreement with Pfizer, Pfizer has agreed to pay a
portion of the costs associated with the purchase of certain equipment. During
the quarter ended June 30, 2004, we received payment from Pfizer for equipment
purchased for which Pfizer had agreed to reimburse us. We have recorded
deferred revenue in connection with the reimbursement for this equipment. We
will amortize the deferred revenue related to this equipment over its expected
life. During the six months ended June 30, 2003 and 2004, respectively, we
recognized $2.1 million and $2.5 million of license fee revenue. At June 30,
2004, we classified as current deferred revenue $5.3 million related to
payments for licenses and equipment. The balance of $64.7 million is classified
as long-term deferred revenue on our balance sheet. We report our revenues on a gross reporting basis, which includes
reimbursement to us from Pfizer of Pfizers
share of our cost of development of Macugen for the period. We have determined
that our responsibilities under our contracts with Pfizer to manage and assume
responsibilities for obtaining FDA approvals for Macugen, including our
separate contractual relationships and responsibilities to our clinical
development contractors and our interaction 12




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with monitors and patients qualify
us as principal under the criteria set forth in Emerging Issues Task Force, or
EITF, Issue 99-19, Reporting Gross Revenue as a Principal vs. Net as an
Agent. Additionally, under EITF Issue 01-14, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred, in those cases where we have a primary obligation to conduct
clinical studies and bear risk for selection of and payment to vendors, among
other conditions, we recognize reimbursements of those costs to us by Pfizer as
revenue, instead of as an offset to the expense incurred. We record as expenses
costs incurred by Pfizer for which we are contractually liable. In future
periods we may be liable for costs incurred where we do not meet the criteria
to be considered as the principal. We would record these costs as expenses, and
we may be required to reimburse Pfizer. Stock-based Compensation Charges Stock-based compensation charges represent the difference between the
exercise price of options and restricted stock granted to employees and
directors and the fair value of our common stock on the date of grant for
financial statement purposes in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. We recognize this compensation
charge over the vesting periods of the shares purchasable upon exercise of
options or the lapsing of restrictions on restricted shares granted. We recorded deferred stock-based compensation related to stock options and
restricted stock granted to employees and directors through June 30, 2004 of
$12.6 million, net of related amortization expense of $2.8 million for the six
months ended June 30, 2004. We expect to amortize deferred stock-based
compensation with respect to stock options and restricted stock awards granted
through June 30, 2004 in future periods, including $2.1 million during the
remainder of 2004, $4.2 million during 2005, $4.1 million during 2006 and $2.2
million during 2007. Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard addresses financial
accounting and reporting for costs associated with an exit or disposal
activities and requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This standard nullifies EITF Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring. This Standard is effective for exit or disposal activities
initiated after December 31, 2002. Our adoption of this statement resulted in
the recognition of a loss of $1.5 million during the quarter ended June 30,
2004. The loss was incurred because we have not subleased our previous
corporate offices at 500 Seventh Avenue in New York City and office equipment
associated with that facility. During the year ended December 31, 2003, the Financial Accounting
Standards Board (FASB) issued various accounting standards and
interpretations, including FASB Statement No 150, Accounting for Certain
Financial Instruments with Characteristics of both Liability and Equity (SFAS
150), Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of ARB 51 and Interpretation No. 46-R
Consolidation of Variable Interest Entities (FIN 46-R). We believe that our
adoption of these standards and interpretations has not had a material effect
on our financial condition, results of operations or liquidity. There have been
no other accounting pronouncements made through June 30, 2004 that we expect
will have a material effect on our results of operations, cash flows or
financial position. Results of Operations Quarters ended June 30, 2003 and 2004 Revenue.Collaboration revenue increased 13% from $11.2 million for the
quarter ended June 30, 2003 to $12.6 million for the quarter ended June 30,
2004. Revenue from the amortization of license fees remained constant while
revenue from reimbursement of development costs increased by $1.4 million.
Increases in development costs resulted primarily from increases in
reimbursable costs related to the development of manufacturing capabilities. Research and Development Expenses.Research and development expenses
increased 72% from $19.7 million for the quarter ended June 30, 2003 to $33.9
million for the quarter ended June 30, 2004. The increase in research and 13




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development expenses of $14.2 million was attributable to $9.2 million of
expenditures related to milestone payments in connection with the filing of our
NDA and payments in connection with the licensing of technologies from third
parties, an increase of $5.4 million relating to the continued development of
manufacturing capabilities and related costs, an increase of $1.1 million
relating to additional hiring of research and development staff and a $0.8
million increase in ongoing expenditures during 2004 in connection with our
Phase 2/3 pivotal clinical trials for the use of Macugen in the treatment of
wet AMD and related costs. These increases in cost were partially offset by a
decrease in costs of $0.5 million in connection with clinical trials for the
use of Macugen in the treatment of DME and $1.8 million associated with the
development of drug delivery technologies and other costs. We anticipate that
research and development expenses will continue to increase as we further
advance Macugen to commercialization and begin to devote additional resources
to other research and development projects. Sales and Marketing Expenses.Sales and marketing expenses increased from
$0.8 million for the quarter ended June 30, 2003 to $6.2 million for the
quarter ended June 30, 2004. The increase in sales and marketing expenses of
$5.4 million was primarily related to $2.7 million in higher personnel
expenses, relating to the hiring and training of sales and sales management
personnel, and $2.7 million of costs related to the development of the Macugen
brand and related to expenditures for development of the infrastructure
necessary to prepare for the commercial launch of Macugen and the detailing of
Xalatan as part of the Pfizer agreement. Of this $2.7 million of costs, $1.5
million was incurred by Pfizer for which we are responsible and is recorded by
us as marketing expenditures. General and Administrative Expenses.General and administrative expenses
increased from $0.3 million for the quarter ended June 30, 2003 to $4.3 million
for the quarter ended June 30, 2004. The increase of $4.0 million resulted from
a $1.5 million loss related to not finding a sub-tenant for our former New York
headquarters, a $1.5 million increase in expenses related to facilities and
infrastructure needed to support our growth and our Pfizer collaboration and
$1.0 million in costs associated with our secondary offering. Interest Income.Interest income increased from $0.6 million in the
quarter ended June 30, 2003 to $0.9 million in the quarter ended June 30, 2004
as a result of higher levels of cash and marketable securities available for
investment, which were partially offset by lower interest rates during 2004
compared to 2003. Six months ended June 30, 2003 and 2004 Revenue.Collaboration revenue increased 31% from $18.5 million for the
six months ended June 30, 2003 to $24.3 million for the six months ended June
30, 2004. Revenue from the amortization of license fees increased by $0.4
million representing an additional month of amortization in 2004 versus 2003
while revenue from reimbursement of development costs increased by $5.3
million. The increases in reimbursable development costs were primarily
related to the development of manufacturing capabilities. Research and Development Expenses.Research and development expenses
increased 78% from $31.3 million for the six months ended June 30, 2003 to
$55.8 million for the six months ended June 30, 2004. The increase in research
and development expenses of $24.5 million was attributable to an increase of
$12.6 million relating to the continued development of manufacturing
capabilities and related costs, an increase of $9.2 million related to
milestone payments incurred in connection with the filing of our NDA for
Macugen in the treatment of wet AMD and payments in connection with the
licensing of technologies from third parties, a $3.0 million increase in
ongoing expenditures in connection with our Phase 2/3 pivotal clinical trials
for the use of Macugen in the treatment of wet AMD and related costs and an
increase of $2.7 million relating to additional hiring of research and
development staff. These increases in cost were partially offset by $0.6
million decrease in expenditures in connection with clinical trials for the use
of Macugen in the treatment of DME and a $2.4 million decrease associated with
the development of drug delivery
technologies and related costs. We anticipate that research and development
expenses will continue to increase as we further advance Macugen to
commercialization and begin to devote additional resources to other research
and development projects. Sales and Marketing Expenses.Sales and marketing expenses increased from
$1.3 million for the six months ended June 30, 2003 to $10.0 million for the
six months ended June 30, 2004. The increase in sales and marketing expenses of
$8.7 million was primarily related to $4.7 million in higher personnel
expenses, relating to the hiring and 14




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training of sales and sales management
personnel, and $4.0 million of costs related to the development of the Macugen
brand and the infrastructure necessary to prepare for the commercial launch of
Macugen and the detailing of Xalatan as part of the Pfizer agreement. Of this
$4.0 million of costs, $2.1 million was incurred by Pfizer and is recorded by
us as marketing expenditures. General and Administrative Expenses.General and administrative expenses
increased from $1.4 million for the six months ended June 30, 2003 to $6.0
million for the six months ended June 30, 2004. The increase of $4.6 million
resulted from a $2.1 million increase in expenses related to facilities and
infrastructure needed to support our growth and our Pfizer collaboration, a
$1.5 million loss related to not finding a sub-tenant for our former New York
headquarters and $1.0 million in costs associated with our secondary offering. Interest Income.Interest income increased from $1.2 million in the six
months ended June 30, 2003 to $1.6 million in the six months ended June 30,
2004 as a result of higher levels of cash and marketable securities available
for investment, which were partially offset by lower interest rates during 2004
compared to 2003. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have financed our operations through public sales
and private placements of our capital stock, the initial license fee that we
received from Pfizer as part of our Macugen collaboration, reimbursement of
development costs from Pfizer and the receipt of interest income. Through June
30, 2004, we have received net proceeds of $332.5 million from the issuance of
shares of common stock, convertible preferred stock and warrants. In connection
with our initial public offering, all shares of preferred stock and related
warrants were converted to common stock prior to June 30, 2004. We have also
received net proceeds from capital equipment financing of $2.4 million. The
table below summarizes our initial issuances of convertible preferred stock and
warrants. Number of
    
    Number of Shares
    
    ApproximateSeries
    
    Date
    
    Shares
    
    Underlying Warrants
    
    Gross Proceeds(In thousands)A
    
    March 2000
    
    
    120,000
    
    
    
    
    
    
    $
    150B
    
    April 2000
    
    
    5,766,332
    
    
    
    1,142,902
    
    
    
    34,600B
    
    January 2001
    
    
    20,666
    
    
    
    
    
    
    
    124C-1
    
    July-August 2001
    
    
    7,964,229
    
    
    
    1,592,846
    
    
    
    54,200C-2
    
    August 2002
    
    
    7,521,777
    
    
    
    1,504,354
    
    
    
    54,200D
    
    February 2003
    
    
    2,747,253
    
    
    
    
    
    
    
    25,000
 On February 4, 2004, we completed an initial public offering of our common
stock of 6,500,000 shares at a price of $21.00 per share. As part of the
offering, we granted to the underwriters an option to purchase an additional
975,000 shares within 30 days of the initial public offering to cover
over-allotments. This option was exercised in February 2004. Net proceeds from
our initial public offering after deducting underwriters discounts and
expenses were $142.9 million, including the exercise of the over-allotment
option. In addition, 476,190 shares of common stock were purchased
concurrently with the initial public offering by Pfizer for $10 million as part
of its commitment under our collaboration with Pfizer. We issued 5,073,435 warrants in connection with original issuances of
preferred stock from April 2000 to August 2002 and the in-licensing of Macugen
in April 2000. Prior to the closing of our initial public offering, 1,511,381
shares of preferred stock were issued in connection with warrant exercises
providing $10.4 million in aggregate proceeds. An additional 1,867,124 shares
of preferred stock were issued on a cashless basis to the holders of 2,728,721
preferred stock warrants, who surrendered 861,597 preferred stock warrants as
payment for those shares. All outstanding shares of preferred stock, including
those shares issued in connection with warrant exercises, were automatically
converted to an equivalent number of shares of common stock upon the closing of
our initial public offering. Additionally, warrants to purchase 833,333 shares
of Series B preferred stock converted to an equal number of warrants to
purchase an equal number of shares of common stock upon the closing of the
initial 15




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public offering. These warrants were exercised during the quarter
ended March 31, 2004 on a cashless basis, resulting in the issuance of 680,509
shares of common stock in exchange for the surrender of warrants to purchase
152,824 shares of common stock. No warrants remain outstanding at June 30,
2004. In connection with our collaboration with Pfizer, we received a $25.0
million investment in our series D preferred stock and a $75.0 million initial
license fee and Pfizer has agreed generally to fund a majority of the ongoing
development costs incurred pursuant to an agreed development plan covering the
development of Macugen for AMD, DME, retinal vein occlusion and other agreed
upon ophthalmic indications. Pfizer purchased an additional $10 million of our
common stock at the closing of our initial public offering in February 2004 and
is obligated to purchase up to an additional $15 million of our common stock
and make additional payments in specified circumstances. These obligations of
Pfizer are contingent upon the achievement of milestones and are currently our
only committed external source of funds. On June 2, 2004, we completed a secondary public offering of our common
stock. The secondary public offering consisted of the sale of 3,860,000 shares
of common stock at a price of $38.50 per share. As part of the offering, the
selling stockholders granted to the underwriters an option to purchase an
additional 579,000 shares within 30 days of the secondary public offering to
cover over-allotments. This option was exercised in full in June 2004. All
shares sold were offered by existing stockholders and employees holding
options. Our shares outstanding increased by 106,735 shares after the offering
as a result of option exercises, which provided proceeds to the Company of $0.1
million. The costs associated with the offering, excluding underwriters
discounts and commissions which were payable by the selling stockholders, were
approximately $1.0 million and have been paid by us. As of June 30, 2004, we had $253.2 million in cash, cash equivalents and
marketable securities. Also as of that date, we had pledged $5.9 million of
restricted cash as collateral for letters of credit for certain of our leased
facilities. We believe that our available cash, cash equivalents and marketable
securities, together with expected milestone payments and reimbursements from
Pfizer under our collaboration and interest income will be sufficient to fund
anticipated levels of operations through at least the end of 2005. We had no
material capital expenditures during the quarter ended June 30, 2004 and expect
to have no material capital expenditures during the remainder of 2004. Income Taxes As of December 31, 2003, we had net operating loss carryforwards for
federal income taxes of $43.3 million. Our utilization of the net operating
loss and tax credit carryforwards may be subject to annual limitations pursuant
to Section 382 of the Internal Revenue Code, and similar state provisions, as a
result of changes in our ownership structure. The annual limitations may result
in the expiration of net operating losses and credits prior to utilization. At December 31, 2003 we had deferred tax assets representing the benefit
of net operating loss carryforwards and certain start up costs capitalized for
tax purposes. We did not record a benefit for the deferred tax asset because
realization of the benefit was uncertain and, accordingly, a full valuation
allowance is provided to offset the deferred tax asset. During the year ended December 31, 2003, the $75 million initial license
fee paid by Pfizer resulted in current taxable income to us. Although we have
generated net operating losses in prior years, we may be liable for payment of
alternative minimum tax in 2003. Accordingly, we provided $1.7 million for
federal alternative minimum tax and state
income taxes for the year ended December 31, 2003. We have not recorded any provision for taxes during the quarter ended June
30, 2004. Cash Flows For the six months ended June 30, 2004, we used net cash of $30.2 million
in operating activities. This consisted primarily of a net loss for the period
of $46.0 million, offset by an increase in accounts payable and accrued
expenses of $8.9 million, an increase in other liabilities of $2.6 million and
$4.9 million in non-cash stock-based compensation. We used $72.0 million for
investing activities for the quarter ended June 30, 2004, which consisted 16




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primarily of net purchases of marketable securities. We received net cash of
$157.0 million from financing activities during the six months ended June 30,
2004, principally relating to the issuance of common stock in our initial
public offering and other issuances of common stock resulting in net proceeds,
after transaction costs, of $154.7 million and the issuance of convertible
preferred stock upon the exercise of warrants for net proceeds of $2.6 million,
offset by the repayment of capital leases of $0.3 million. Funding Requirements We expect to devote substantial resources to continue our research and
development efforts and to expand our sales, marketing and manufacturing
programs associated with the commercialization and launch of Macugen and other
future products. Our funding requirements will depend on numerous factors,
including:  
    
    the success of our collaborative arrangement with Pfizer for the development and commercialization of Macugen;
    
    the scope and results of our clinical trials;
    
    advancement of other product candidates into development;
    
    potential acquisition or in-licensing of other products or technologies;
    
    the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
    
    the cost of manufacturing activities;
    
    the cost of commercialization activities, including product marketing, sales and distribution;
    
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other
patent-related costs, including litigation costs and the results of such litigation; and
    
    our ability to establish and maintain additional collaborative arrangements. We do not expect to generate significant additional funds, other than
payments that we receive from our collaboration with Pfizer, until we
successfully obtain marketing approval for, and begin selling, Macugen. We
believe that the key factors that will affect our internal and external sources
of cash are:  
    
    our ability to successfully obtain marketing approval for and to commercially launch Macugen;
    
    the success of our other preclinical and clinical development programs;
    
    the receptivity of the capital markets to financings by biotechnology companies; and
    
    our ability to enter into additional strategic collaborations with corporate and academic collaborators and
the success of such collaborations. 17




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If our existing resources are insufficient to satisfy our liquidity
requirements or if we acquire or license rights to additional product
candidates, we may need to raise additional external funds through the sale of
additional equity or debt securities. The sale of additional equity securities
may result in additional dilution to our stockholders. Additional financing may
not be available in amounts or on terms acceptable to us or at all. If we are
unable to obtain additional financing, we may be required to reduce the scope
of, delay or eliminate some or all of our planned research, development and
commercialization activities, which could harm our financial condition and
operating results. Contractual Obligations Our major outstanding contractual obligations relate to our capital leases
from equipment financings, facilities leases and obligations under a number of
our collaboration and alliance agreements to pay milestone payments and
royalties to the other parties to these agreements. We have summarized in the table below our fixed contractual cash
obligations as of June 30, 2004. Payments Due by PeriodLess Than
    
    One to
    
    Four to
    
    AfterContractual Obligations
    
    Total
    
    One Year
    
    Three Years
    
    Five Years
    
    Five YearsCapital lease obligations,
including interest
    
    $
    1,355,097
    
    
    $
    648,622
    
    
    $
    706,475
    
    
    $
    
    
    
    $
    Operating leases
    
    
    79,361,853
    
    
    
    2,986,870
    
    
    
    12,474,318
    
    
    
    10,093,436
    
    
    
    53,807,229Total contractual cash obligations
    
    $
    80,716,950
    
    
    $
    3,635,492
    
    
    $
    13,180,793
    
    
    $
    10,093,436
    
    
    $
    53,807,229
 Under our agreements with Gilead Sciences, Inc., Nektar Therapeutics, and
Isis Pharmaceuticals, Inc., we are obligated to make payments aggregating up to
$36.3 million, of which $7.5 million has been accrued at June 30, 2004, upon
achieving specified milestones relating to the development and regulatory
approval of Macugen and to pay royalties based on net sales of Macugen. The
events that trigger the milestone payments include filing of a new drug
application, or NDA, with the FDA, making similar filings with foreign
regulatory authorities, receiving marketing approval for Macugen by the FDA or
similar foreign regulatory authorities and the first commercial sale of Macugen
in various countries. These contingent milestone and royalty payment
obligations are not included in the above table. The above table also excludes
approximately $2.0 million in minimum fixed site fees payable to one of our
contract manufacturers on a quarterly basis. In January 2004, we entered into a sub-sublease arrangement for new
corporate headquarters, clinical, safety and regulatory space in New York City.
Our rent expense under the lease is expected to be $3.2 million in 2004.
However, due to 2004 rent abatements, we expect cash expenditures for this
property in 2004 to be $0.1 million. As security for the sublease, we have
named the sub-landlord as beneficiary under a secured bank letter of credit in
the amount of $3.0 million, which is included in restricted cash on the balance
sheet. We have not sub-leased our former corporate offices at 500 Seventh Avenue,
New York, New York, and as a result, under generally accepted accounting
principles we have assessed the recoverability of the carrying value of our
lease. We have determined that the amounts due under the lease will not be
recoverable, and have recorded a loss in connection with this lease. The loss
of $1.5 million was recorded in the second quarter of 2004 and includes the
write down of certain office equipment. In connection with our cessation of use
of this facility, we had previously accelerated the recognition of amortization
and depreciation expenses in connection with certain leasehold improvements and
furniture and fixtures used at this facility. This resulted in an increase of
$0.3 million to amortization and depreciation expense during the six months
ended June 30, 2004. In May 2004, we entered into a lease agreement for new research and
development space to replace our Woburn research facility. Payments related to
this new space are included in the table above listing our contractual
obligations and are expected to result in approximately $1.6 million of
additional expense annually. If we do not 18




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sub-lease our space at 42 Cummings
Park, Woburn, Massachusetts, we will be required under generally accepted
accounting principles to assess the recoverability of the carrying value of our
lease. If it is determined that the amounts due under the lease will not be
recoverable, we will record a loss in connection with this lease. The loss
could be up to approximately $1.1 million and will be recorded during the
second half of 2004. 19




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RISK FACTORS THAT MAY AFFECT RESULTS Risks Relating to Our Business We depend heavily on the success of our lead product candidate, Macugen, which
is still under development. If we are unable to commercialize Macugen, or
experience significant delays in doing so, our business will be materially
harmed. We have invested a significant portion of our time and financial resources
since our inception in the development of Macugen. We anticipate that in the
near term our ability to generate revenues will depend solely on the successful
development and commercialization of Macugen. The commercial success of Macugen
will depend on several factors, including the following:  
    
    successful completion of clinical trials;  
    
    producing batches of the active pharmaceutical ingredient used in Macugen as well as finished drug product in sufficient
commercial quantities through a validated process;  
    
    receipt of marketing approvals from the FDA and similar foreign regulatory authorities;  
    
    launching commercial sales of the product in collaboration with Pfizer;  
    
    successfully building and sustaining manufacturing capacity to meet anticipated future market demand; and  
    
    acceptance of the product in the medical community, by patients receiving therapy and by third party payors. Based on the results from the first year of our ongoing Phase 2/3 pivotal
clinical trials for the use of Macugen in the treatment of wet AMD, we and
Pfizer have filed a new drug application with the FDA as a rolling submission
to seek marketing approval for Macugen in the treatment of wet AMD. We are
seeking marketing approval for the use of Macugen in the treatment of all
angiographic subtypes of active subfoveal neovascular AMD, which represents the
same broad patient population we studied in our clinical trials. The FDA has
accepted for review the preclinical and clinical study report sections of our
NDA. However, the FDA may not accept our full submission as complete. The FDA
may also request additional information from us, including data from additional
clinical trials. Furthermore, new information may arise from our continuing
analysis of the data from our clinical trials that may be less favorable than
currently anticipated. Clinical data often are susceptible to varying
interpretations and many companies that have believed that their products
performed satisfactorily in clinical trials have nonetheless failed to obtain
FDA approval for their products. The FDA may not grant marketing approval for
Macugen. The FDA may grant marketing approval but may not grant such approval
to the extent we have requested in our NDA. Even if we are granted marketing
approval for Macugen, if we are not successful in commercializing Macugen, or
are significantly delayed in doing so, our business will be materially harmed
and we may need to curtail or cease operations. The success of Macugen depends heavily on our collaboration with Pfizer, which
was established in December 2002 and involves a complex sharing of control over
decisions, responsibilities and costs and benefits. Any loss of Pfizer as a
collaborator, or adverse development in the collaboration, would materially
harm our business. In December 2002, we entered into our collaboration with Pfizer to develop
and commercialize Macugen for the prevention and treatment of diseases of the
eye. The collaboration involves a complex sharing of control over decisions,
responsibilities and costs and benefits. For example, with respect to the
sharing of costs and benefits, Pfizer will co-promote Macugen with us in the
United States and will share with us in profits and losses. Outside the United
States, Pfizer will commercialize Macugen pursuant to an exclusive license and
pay us a royalty on net sales. In addition, Pfizer generally is required to
fund a majority of ongoing development costs incurred pursuant to an agreed
upon development plan. With respect to control over decisions and
responsibilities, the collaboration is governed by a joint operating committee,
consisting of an equal number of representatives of Pfizer and us. There are
also subcommittees with equal representation from both parties that have
responsibility over development, regulatory, manufacturing and
commercialization matters. Ultimate decision-making authority is vested in us as to some matters and
in Pfizer as to other matters. A third
category of decisions requires the approval of both Pfizer and us. Outside
the United States, ultimate decision- 20




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making authority as to most matters is
vested in Pfizer. Pfizer may terminate the collaboration relationship without
cause upon six to twelve months prior notice, depending on when such notice is
given. Any loss of Pfizer as a collaborator in the development or
commercialization of Macugen, dispute over the terms of, or decisions
regarding, the collaboration or other adverse development in our relationship
with Pfizer would materially harm our business and might accelerate our need
for additional capital. If our clinical trials are unsuccessful, or if we experience significant delays
in these trials, our ability to commercialize Macugen and our future product
candidates will be impaired. We must provide the FDA and similar foreign regulatory authorities with
preclinical and clinical data that demonstrate that our product candidates are
safe and effective for each target indication before they can be approved for
commercial distribution. The preclinical testing and clinical trials of any
product candidates that we develop must comply with regulations by numerous
federal, state and local government authorities in the United States,
principally the FDA, and by similar agencies in other countries. Clinical
development is a long, expensive and uncertain process and is subject to
delays. We may encounter delays or rejections based on our inability to enroll
or keep enrolled enough patients to complete our clinical trials. Patient
enrollment depends on many factors, including the size of the patient
population, the nature of the trial protocol, the proximity of patients to
clinical sites and the eligibility criteria for the study. Our ongoing Phase 2/3 pivotal clinical trial for the use of Macugen in the
treatment of wet AMD and Phase 2 clinical trial for use of Macugen in the
treatment of DME are currently fully enrolled. We are currently enrolling
patients in our Phase 2 clinical trial for the use of Macugen in the treatment
of retinal vein occlusion. We also may commence additional clinical trials in
the future. Although we have not to date experienced any significant delays in
enrolling clinical trial patients for our ongoing clinical trials, delays in
patient enrollment for future trials may result in increased costs and delays,
which could have a harmful effect on our ability to develop products. It may take several years to complete the testing of a product, and
failure can occur at any stage of testing. For example:  
    
    interim results of preclinical or clinical studies are not necessarily
predictive of their final results, and acceptable results in early
studies might not be seen in later studies, in large part because
earlier phases of studies are often conducted on smaller groups of
patients than later studies, and without the same trial design
features, such as randomized controls and long-term patient follow-up
and analysis;  
    
    potential products that appear promising at early stages of
development may ultimately fail for a number of reasons, including the
possibility that the products may be ineffective, less effective than
products of our competitors or cause harmful side effects;  
    
    any preclinical or clinical test may fail to produce results
satisfactory to the FDA or foreign regulatory authorities;  
    
    preclinical and clinical data can be interpreted in different ways,
which could delay, limit or prevent regulatory approval;  
    
    negative or inconclusive results from a preclinical study or clinical
trial or adverse medical events during a clinical trial could cause a
preclinical study or clinical trial to be repeated or a program to be
terminated, even if other studies or trials relating to the program
are successful;  
    
    the FDA can place a hold on a clinical trial if, among other reasons,
it finds that patients enrolled in the trial are or would be exposed
to an unreasonable and significant risk of illness or injury;  
    
    we may encounter delays or rejections based on changes in regulatory
agency policies during the period in which we develop a drug or the
period required for review of any application for regulatory agency
approval; and  
    
    our clinical trials may not demonstrate the safety and efficacy needed
for our products to receive regulatory approval. We have completed the first year of our Phase 2/3 pivotal clinical trials
for the use of Macugen in the treatment of
wet AMD. Based on results from the first year of these trials, we and
Pfizer have filed our NDA with the FDA for the use of Macugen in the treatment
of wet AMD as a rolling submission. The FDA has accepted for review the 21




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preclinical and clinical study report sections of our NDA filing.. We are
currently conducting a second year of these trials. We have also fully enrolled
a Phase 2 clinical trial for the use of Macugen in the treatment of DME. To
obtain marketing approval, we may decide to, or the FDA or other regulatory
authorities may require us to, pursue additional clinical trials or other
studies of Macugen. For example, in addition to our Phase 2 clinical trial for
the use of Macugen in the treatment of DME, we anticipate that we need to
conduct Phase 3 clinical trials for DME before filing a new drug application or
supplemental new drug application for this second indication. In addition, as part of the drug approval process, we must conduct a
comprehensive assessment of the carcinogenic, or cancer causing, potential of
our product candidates. Our testing of Macugen to date indicates that the
products carcinogenic potential is low. In one test for carcinogenicity risk, two potential Macugen metabolites showed, in one
out of five bacterial strains tested, a small increase in the number of altered bacteria, a potential indicator of carcinogenicity
risk. However, because this elevated proportion of altered bacteria did not increase further as we increased the dose of the
metabolites, we do not believe the results from these tests indicate carcinogenicity potential. Furthermore, no other test,
including animal studies, of Macugen and its metabolites showed carcinogenic potential.
We have requested that the FDA grant
us a waiver from the requirement to perform full animal carcinogenicity studies
for the treatment of wet AMD based primarily on the unmet medical need
presented by wet AMD, low overall systemic exposure to Macugen and the fact
that this disease generally affects older populations. However, the FDA may
require us to conduct additional carcinogenicity testing of Macugen. Based on
our discussions with the FDA to date, if we are required to conduct further
carcinogenicity testing of Macugen in connection with its use in the treatment
of wet AMD, we believe that the FDA will allow us to conduct any such testing
as a post-NDA approval study. However, we will not be certain of this until the
NDA review process of Macugen for this indication is completed. The FDA may
require us to complete satisfactory carcinogenicity testing of Macugen prior to
any approval of the use of Macugen in the treatment of DME. If we are required to conduct additional clinical trials or other studies
of Macugen beyond those that we currently contemplate, if we are unable to
successfully complete our clinical trials or other studies or if the results of
these trials or studies are not positive or are only modestly positive, we may
be delayed in obtaining marketing approval for Macugen, we may not be able to
obtain marketing approval or we may obtain approval for indications that are
not as broad as intended. Our product development costs will also increase if
we experience delays in testing or approvals. Significant clinical trial delays
could allow our competitors to bring products to market before we do and impair
our ability to commercialize our products or potential products. If any of this
occurs, our business will be materially harmed. We face substantial competition, which may result in others discovering,
developing or commercializing products before or more successfully than we do. The development and commercialization of new drugs is highly competitive.
We will face competition with respect to Macugen and any products we may
develop or commercialize in the future from major pharmaceutical companies,
specialty pharmaceutical companies and biotechnology companies worldwide. Our
competitors may develop products or other novel technologies that are more
effective, safer or less costly than any that we are developing. Our
competitors may also obtain FDA or other regulatory approval for their products
more rapidly than we may obtain approval for ours. The two therapies currently available for the treatment of wet AMD are
photodynamic therapy, which was developed by QLT, Inc. and is marketed by
Novartis AG, and thermal laser treatment. In the United States, photodynamic
therapy is FDA-approved only for the predominantly classic subtype of wet AMD.
In the European Union, there is an approved therapy only for the predominantly
classic and occult subtypes. In the United States, however, the Centers for
Medicare & Medicaid Services implemented a decision in April 2004 to provide
coverage for photodynamic therapy to patients with wet AMD who have occult and
minimally classic lesions that are four disc areas or less in size and show
evidence of recent disease progression even though the FDA has not approved
photodynamic therapy for such treatment. The current therapies for the treatment of DME are thermal laser treatment
and steroid treatment administered by physicians on an off-label basis. Unless
additional therapies are approved, these existing therapies will represent the
principal competition for Macugen if Macugen is approved for marketing. Additional treatments for AMD and DME are in various stages of preclinical
or clinical testing. If approved, these treatments would also compete with
Macugen. Potential treatments in late stage clinical trials include drugs
sponsored by a collaboration of Genentech, Inc. and Novartis, Alcon, Inc.,
Allergan, Inc. through its acquisition of Oculex Pharmaceuticals, Inc., Eli
Lilly and Co., Bausch & Lomb Incorporated, a collaboration of Regeneron 22




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Pharmaceuticals, Inc. and Aventis S.A., Miravant Medical Technologies, and
Genaera Corporation. Some of the sponsors of these potential products have
recently announced favorable results from Phase 1 or Phase 2 clinical trials.
The Genentech/Novartis collaboration is developing an anti-VEGF humanized
antibody fragment for intravitreal injection. This product candidate may be
viewed as particularly competitive with Macugen because of the similarity of
its mechanism of action. In addition, Alcon expects to announce results of its
Phase 3 clinical trial of anecortave acetate, an angiostatic compound, for the
treatment of wet AMD patients, that features a less invasive injectable
delivery that requires less frequent administration (every six months), in the
fourth quarter of 2004 and to file an NDA thereafter for wet AMD. Further,
Alcon is enrolling patients in two Phase 3 clinical trials, one in South
America and one in Europe, comparing the safety and efficacy of Alcons
compound against placebo in patients with all subtypes of wet AMD. Other laser,
surgical or pharmaceutical treatments for AMD and DME may also compete against
Macugen. These competitive therapies may result in pricing pressure if we
receive marketing approval for Macugen even if Macugen is otherwise viewed as a
preferable therapy. Many of our competitors have substantially greater financial, technical
and human resources than we have. Additional mergers and acquisitions in the
pharmaceutical and biotechnology industries may result in even more resources
being concentrated by our competitors. Competition may increase further as a
result of advances made in the commercial applicability of technologies and
greater availability of capital for investment in these fields. We may not be successful in our efforts to expand our portfolio of products. A key element of our strategy is to commercialize a portfolio of new
ophthalmic drugs in addition to Macugen. We are seeking to do so through our
internal research programs and through licensing or otherwise acquiring the
rights to potential new drugs and drug targets for the treatment of ophthalmic
disease. A significant portion of the research that we are conducting involves new
and unproven technologies. Research programs to identify new disease targets
and product candidates require substantial technical, financial and human
resources whether or not we ultimately identify any candidates. Our research
programs may initially show promise in identifying potential product
candidates, yet fail to yield product candidates for clinical development for a
number of reasons, including:  
    
    the research methodology used may not be successful in identifying potential product candidates; or  
    
    potential product candidates may on further study be shown to have harmful side effects or other characteristics that

indicate they are unlikely to be effective drugs. We may be unable to license or acquire suitable product candidates or
products from third parties for a number of reasons. In particular, the
licensing and acquisition of pharmaceutical products is a competitive area. A
number of more established companies are also pursuing strategies to license or
acquire products in the ophthalmic field. These established companies may have
a competitive advantage over us due to their size, cash resources and greater
clinical development and commercialization capabilities. Other factors that may
prevent us from licensing or otherwise acquiring suitable product candidates
include the following:  
    
    we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return
from the product;  
    
    companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or  
    
    we may be unable to identify suitable products or product candidates within our areas of expertise. If we are unable to develop suitable potential product candidates through
internal research programs or by obtaining rights to novel therapeutics from
third parties, our business will suffer. Market acceptance of Macugen and other products we develop in the future that
are based on new technologies may be limited. The commercial success of the products for which we may obtain marketing
approval from the FDA or other 23




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regulatory authorities will depend upon the
acceptance of these products by the medical community and third party payors as
clinically useful, cost-effective and safe. Even if a potential product
displays a favorable efficacy and safety profile in clinical trials, market
acceptance of the product will not be known until after it is commercially
launched. We expect that many of the products that we develop will be based
upon new technologies. For example, Macugen is an aptamer, which is a type of
nucleic acid. To date, no aptamer has been approved as a pharmaceutical by the
FDA. As a result, it may be more difficult for us to achieve market acceptance
of our products, particularly the first products that we introduce to the
market based on new technologies. Our efforts to educate the medical community
about these potentially unique approaches may require greater resources than
would be typically required for products based on conventional technologies.
The safety, efficacy, convenience and cost-effectiveness of our products as
compared to competitive products will also affect market acceptance. We are in the process of establishing our sales and marketing capabilities. We
will need to build a sales infrastructure to successfully commercialize Macugen
and other products that we develop, acquire or license. We have limited experience as a company in selling products. We have
completed our efforts to hire a specialty sales force with significant industry
experience to market and sell Macugen in the United States in collaboration
with Pfizer, assuming we receive regulatory approval to do so, and are in the
process of preparing our sales force to detail Xalatan and launch Macugen.
While we have personnel with significant marketing experience and have been
collaborating with our partner, Pfizer, we have limited experience as a company
marketing products. To achieve commercial success for any approved product, we
must develop an effective sales and marketing organization. If we are not
successful in building and implementing a sales and marketing infrastructure,
our business will materially suffer. Moreover, if the commercial launch of
Macugen is delayed as a result of FDA requirements or other reasons, our
investment in our sales and marketing infrastructure would not be fully
utilized and may be lost if we cannot retain our sales and marketing personnel. We expect to depend on collaborations with third parties to develop and
commercialize our products. Our business strategy includes entering into collaborations with corporate
and academic collaborators for the research, development and commercialization
of additional product candidates, such as our collaboration with Pfizer and
Archemix Corp. These arrangements may not be scientifically or commercially
successful. The termination of any of these arrangements might adversely affect
our ability to develop, commercialize and market our products. The success of our collaboration arrangements will depend heavily on the
efforts and activities of our collaborators. Our collaborators will have
significant discretion in determining the efforts and resources that they will
apply to these collaborations. The risks that we face in connection with these
collaborations, including our collaboration with Pfizer, include the following:  
    
    our collaboration agreements are, or are expected to be, for fixed
terms and subject to termination under various circumstances,
including, in many cases, on short notice without cause;  
    
    we expect to be required in our collaboration agreements not to
conduct specified types of research and development in the field that
is the subject of the collaboration. These agreements may have the
effect of limiting the areas of research and development that we may
pursue, either alone or in cooperation with third parties;  
    
    our collaborators may develop and commercialize, either alone or with
others, products and services that are similar to or competitive with
our products that are the subject of the collaboration with us; and  
    
    our collaborators may change the focus of their development and
commercialization efforts. Pharmaceutical and biotechnology companies
historically have re-evaluated their priorities following mergers and
consolidations, which have been common in recent years in these
industries. The ability of our products to reach their potential could
be limited if our collaborators decrease or fail to increase spending
relating to such products. Collaborations with pharmaceutical companies and other third parties often are
terminated or allowed to expire by the other party. Such terminations or
expirations can adversely affect us financially as well as harm our business
reputation. 24




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We may not be successful in establishing additional collaborations, which could
adversely affect our ability to develop and commercialize products and
services. An important element of our business strategy is entering into
collaborations for the development and commercialization of products when we
believe that doing so will maximize product value. If we are unable to reach
agreements with suitable collaborators, we may fail to meet our business
objectives for the affected product or program. We face significant competition
in seeking appropriate collaborators. Moreover, these collaboration
arrangements are complex to negotiate and time consuming to document. We may
not be successful in our efforts to establish additional collaborations or
other alternative arrangements. The terms of any additional collaborations or
other arrangements that we establish may not be favorable to us. Moreover,
these collaborations or other arrangements may not be successful. We have no manufacturing facilities and a limited number of manufacturing
personnel. We will depend on third parties to manufacture Macugen and future
products. If these manufacturers fail to meet our requirements, our product
development and commercialization efforts may be materially harmed. We have a limited number of personnel with experience in, and we do not
own facilities for, manufacturing any products. We will depend on third parties
to manufacture Macugen and any future products that we may develop. For our clinical trials of Macugen, we engaged a third party manufacturer
to produce the active pharmaceutical ingredient used in Macugen. We have
entered into an agreement and completed the transfer of the manufacturing
technology and process with an affiliate of this third party for commercial
supply of the active pharmaceutical ingredient. For our clinical trials of
Macugen, we also engaged a separate fill and finish manufacturer for the
finished drug product to formulate the active pharmaceutical ingredient from a
solid into a solution and to fill the solution into syringes. We have entered
into an agreement with this manufacturer to provide these finished product
services for commercial supply. These manufacturers of Macugen will be single
source suppliers to us for a significant period of time. We also expect to
continue to rely on a single source of supply for the PEGylation reagent used
in the manufacture of Macugen. In order to sustain Macugen supply at the quantities we believe will be
necessary to meet anticipated future market demand, we and our contract
manufacturer will need to increase the manufacturing capacity for the active
pharmaceutical ingredient of Macugen. We believe we currently have sufficient
capacity to supply the active pharmaceutical ingredient to meet anticipated
demand for Macugen for approximately 24 months after approval if the product is
approved based on a 0.3 mg dose. If Macugen is approved based on a 1.0 mg
dose, our need to increase supply and capacity for production of the active
pharmaceutical ingredient would be greater. We initially intend to increase
manufacturing capacity for the active pharmaceutical ingredient by duplicating
a portion of our manufacturing lines at the contract manufacturers facility.
We are also exploring other alternatives for increasing manufacturing capacity.
If we are unable to increase our manufacturing capacity or are delayed in
doing so, we may not be able to produce Macugen in a sufficient quantity to
meet future requirements to sustain supply of the product to meet anticipated
future demand. In addition, the cost of increasing manufacturing capacity may
be expensive. Our revenues and gross margins could be adversely affected by
any inability to meet demand and the increased cost in increasing manufacturing
capacity. Reliance on third party manufacturers entails risks to which we would not
be subject if we manufactured products ourselves, including:  
    
    reliance on the third party for regulatory compliance and quality assurance;  
    
    the possible breach of the manufacturing agreement by the third party because of factors beyond our control;
and  
    
    the possibility of termination or non-renewal of the agreement by the third party, based on its own business priorities, at
a time that is costly or inconvenient for us. We may establish our own manufacturing facilities to manufacture Macugen
or other future products. We would need to invest substantial additional funds
and recruit qualified personnel in order to build or lease and operate any
manufacturing facilities. 25




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The manufacture and packaging of pharmaceutical products such as Macugen are
subject to the requirements of the FDA and similar foreign regulatory bodies.
If we or our third party manufacturers fail to satisfy these requirements, our
product development and commercialization efforts may be materially harmed. The manufacture and packaging of pharmaceutical products, such as Macugen
and our future product candidates, are regulated by the FDA and similar foreign
regulatory bodies and must be conducted in accordance with the FDAs current
good manufacturing practices and comparable requirements of foreign regulatory
bodies. There are a limited number of manufacturers that operate under these
current good manufacturing practices regulations who are both capable of
manufacturing Macugen and willing to do so. Failure by us or our third party
manufacturers to comply with applicable regulations, requirements, or
guidelines could result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of regulatory authorities to grant
marketing approval of our products, delays, suspension or withdrawal of
approvals, license revocation, seizures or recalls of product, operating
restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business. For example, if the facilities used for the
manufacturing and testing of Macugen are delayed in passing FDA pre-approval
inspection to ensure compliance with FDA standards, we may be delayed in
launching Macugen and our anticipated future revenues and financial results may
be materially adversely affected. Changes in the manufacturing process or procedure, including a change in
the location where the product is manufactured or a change of a third party
manufacturer, may require prior FDA review and/or approval of the manufacturing
process and procedures in accordance with the FDAs current good manufacturing
practices. There are comparable foreign requirements. This review may be costly
and time consuming and could delay or prevent the launch of a product. For
example, our third party contract manufacturer changed the site used to
manufacture the active pharmaceutical ingredient of Macugen. We have completed
the transfer of the relevant manufacturing technology and the manufacturing
process to the new site, have used the new site to supply the active
pharmaceutical ingredient of Macugen for use in our clinical trials and plan to
continue to use this site to produce commercial quantities of the active
pharmaceutical ingredient of Macugen. If we cannot establish, to the
satisfaction of the FDA, that the products manufactured at the new site are
comparable to those manufactured at the initial site, we may not obtain or may
be delayed in obtaining approval to launch Macugen. In addition, if we elect to
manufacture products in our own facility or at the facility of another third
party, we would need to ensure that the new facility and the manufacturing
process are in substantial compliance with current good manufacturing
practices. Any such change in facility would be subject to a pre-approval
inspection by FDA and would again require us to demonstration product
comparability to the FDA. Furthermore, in order to obtain approval of our products, including
Macugen, by the FDA and foreign regulatory agencies, we will be required to
consistently produce the active pharmaceutical ingredient and the finished
product in commercial quantities and of specified quality on a repeated basis
and document our ability to do so. This requirement is referred to as process
validation. We have completed the validation process for the active
pharmaceutical ingredient. We need to complete process validation on the
finished product in the packaging we propose for commercial sales. This
includes testing of stability, measurement of impurities and testing of other
product specifications by validated test methods. If the FDA does not consider
the result of the process validation or required testing to be satisfactory, we
may not obtain approval to launch the product or approval may be delayed. The FDA and similar foreign regulatory bodies may also implement new
standards, or change their interpretation and enforcement of existing standards
and requirements, for manufacture, packaging, or testing of products at any
time. If we are unable to comply, we may be subject to regulatory, civil
actions or penalties which could significantly
and adversely affect our business. Macugen and our other potential products may not be commercially viable if we
fail to obtain an adequate level of reimbursement for these products by
Medicare and other third party payors. The markets for our products may also be
limited by the indications for which their use may be reimbursed or the
frequency in which they may be administered. The availability and levels of reimbursement by governmental and other
third party payors affect the market for products such as Macugen and others
that we may develop. These third party payors continually attempt to contain or
reduce the costs of healthcare by challenging the prices charged for medical
products and services. In some 26




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foreign countries, particularly Canada and the
countries of the European Union, the pricing of prescription pharmaceuticals is
subject to governmental control. In these countries, pricing negotiations with
governmental authorities can take six to twelve months or longer after the
receipt of regulatory marketing approval for a product. To obtain reimbursement
or pricing approval in some countries, we may be required to conduct a clinical
trial that compares the cost-effectiveness of our products, including Macugen,
to other available therapies. If reimbursement for our products is unavailable
or limited in scope or amount or if pricing is set at unsatisfactory levels,
our business could be materially harmed. Because most persons suffering from wet AMD are elderly, we expect that
coverage for Macugen in the United States will be primarily through the
Medicare program. Although drugs that are not usually self-administered are
ordinarily covered by Medicare, the Medicare program has taken the position
that it can decide not to cover particular drugs if it determines that they are
not reasonable and necessary for Medicare beneficiaries. Limitations on
coverage could also be imposed at the local Medicare carrier level or by fiscal
intermediaries. Our business could be materially adversely affected if the
Medicare program, local Medicare carriers or fiscal intermediaries were to make
such a determination and deny or limit the reimbursement of Macugen. Our
business also could be adversely affected if physicians are not reimbursed by
Medicare for the cost of the procedure in which they administer Macugen on a
basis satisfactory to the administering physicians. If the local contractors
that administer the Medicare program are slow to reimburse physicians for
Macugen, the physicians may pay us more slowly, which would adversely affect
our working capital requirements. We also will need to obtain approvals for payment for Macugen from private
insurers, including managed care organizations. We expect that private insurers
will consider the efficacy, cost-effectiveness and safety of Macugen in
determining whether to approve reimbursement for Macugen therapy and at what
level. Obtaining these approvals can be a time consuming and expensive process.
Our business would be materially adversely affected if we do not receive
approval for reimbursement of Macugen from private insurers on a satisfactory
basis. Our business could also be adversely affected if the Medicare program or
other reimbursing bodies or payors limit the indications for which Macugen will
be reimbursed to a smaller set than we believe it is effective in treating or
establish a limitation on the frequency with which Macugen may be administered
that is less often than we believe would be effective. We expect to experience pricing pressures in connection with the sale of
Macugen and our future products due to the trend toward programs aimed at
reducing healthcare costs, the increasing influence of health maintenance
organizations and additional legislative proposals. The recent Medicare prescription drug coverage legislation and future
legislative or regulatory reform of the healthcare system may affect our
ability to sell our products profitably. In both the United States and some non-U.S. jurisdictions, there have been
a number of legislative and regulatory proposals to change the healthcare
system in ways that could affect our ability to sell our products profitably.
In the United States, new legislation has been proposed at the federal and
state levels that would result in significant changes to the healthcare system,
either nationally or at the state level. In particular, in December 2003,
President Bush signed into law new Medicare prescription drug coverage
legislation. Effective January 2004, the legislation
changed the methodology used to calculate reimbursement for drugs such as
Macugen that are administered in physicians offices in a manner intended to
reduce the amount that is subject to reimbursement. In addition, beginning in
January 2006, the legislation directs the Secretary of Health and Human
Services to contract with procurement organizations to purchase
physician-administered drugs from the manufacturers and provides physicians
with the option to obtain drugs through these organizations as an alternative
to purchasing from the manufacturers, which some physicians may find
advantageous. These changes may also cause private insurers to reduce the
amounts that they will pay for physician-administered drugs. In addition, the
Centers for Medicare & Medicaid Services, or CMS, the agency within the
Department of Health and Human Services that administers Medicare and will be
responsible for reimbursement of the cost of Macugen, has asserted the
authority of Medicare not to cover particular drugs if it determines that they
are not reasonable and necessary for Medicare beneficiaries or to cover them
at a lesser rate, comparable to that for drugs already reimbursed that CMS
considers to be therapeutically comparable. Further federal and state proposals
and healthcare reforms are likely. Our results of operations could be
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adversely affected by the Medicare prescription drug coverage
legislation, by the possible effect of this legislation on amounts that private
insurers will pay and by other healthcare reforms that may be enacted or
adopted in the future. We face the risk of product liability claims and may not be able to obtain
insurance. Our business exposes us to the risk of product liability claims that is
inherent in the manufacturing, testing and marketing of drugs and related
products. If the use of one or more of our products harms people, we may be
subject to costly and damaging product liability claims. We have product
liability insurance that covers our clinical trials up to a $10 million annual
aggregate limit. We intend to expand our insurance coverage to include the sale
of commercial products if we obtain marketing approval for any of the products
that we may develop. Insurance coverage is increasingly expensive. We may not
be able to obtain or maintain adequate protection against potential
liabilities. If we are unable to obtain insurance at acceptable cost or
otherwise protect against potential product liability claims, we will be
exposed to significant liabilities, which may materially and adversely affect
our business and financial position. These liabilities could prevent or
interfere with our product development and commercialization efforts. We depend on our key personnel. If we are not able to retain them or recruit
additional technical personnel, our business will suffer. We are highly dependent on the principal members of our management and
scientific staff, particularly Dr. David R. Guyer, our co-founder and Chief
Executive Officer, and Dr. Anthony P. Adamis, our scientific pioneer, Chief
Scientific Officer and Senior Vice President, Research. Our employment
agreements with these and our other executive officers are terminable on short
or no notice. We do not carry key man life insurance on any of our key
personnel. The loss of service of any of our key employees could harm our
business. In addition, our growth will require us to hire a significant number of
qualified technical, commercial and administrative personnel. There is intense
competition from other companies and research and academic institutions for
qualified personnel in the areas of our activities. If we cannot continue to
attract and retain, on acceptable terms, the qualified personnel necessary for
the continued development of our business, we may not be able to sustain our
operations or grow. We depend on third parties in the conduct of our clinical trials for Macugen
and any failure of those parties to fulfill their obligations could adversely
affect our development and commercialization plans. We depend on independent clinical investigators, contract research
organizations and other third party service providers in the conduct of our
clinical trials for Macugen and expect to do so with respect to other product
candidates. We rely heavily on these parties for successful execution of our
clinical trials, but do not control many aspects of their activities. For
example, the investigators are not our employees. However, we are responsible
for ensuring that each of our clinical trials is conducted in accordance with
the general investigational plan and protocols for the trial. Third parties may
not complete activities on schedule, or may not conduct our clinical trials in
accordance with regulatory requirements or our stated protocols. The failure of
these third parties to carry out their
obligations could delay or prevent the development, approval and
commercialization of Macugen and future product candidates. Regulatory Risks We may not be able to obtain marketing approval for any of the products
resulting from our development efforts, including Macugen. Failure to obtain
these approvals could materially harm our business. Although we may not require additional research and development for the
approval of Macugen for the treatment of wet AMD, the use of Macugen for the
treatment of other indications and other products that we are developing or may
develop in the future will require additional research and development. The
research and development work that we must perform will include extensive
preclinical studies and clinical trials. We will be required to obtain an
investigational new drug application, or IND, prior to initiating human
clinical trials in the United States and must obtain regulatory approval prior
to any commercial distribution. This process is expensive, uncertain and
lengthy, 28




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often taking a number of years until a product is approved for
commercial distribution. We have only one product, Macugen, that has advanced
to clinical trials. We have not received regulatory approval to market Macugen
in any jurisdiction. Failure to obtain required regulatory approvals could
materially harm our business. We
may need to successfully address a number of technological challenges
in order to complete the development of Macugen or any of our future products,
such as manufacturing process validation and product specification testing. In addition, administration of a drug via intravitreal injection is a new
method for the potentially long-term treatment of chronic eye disease. As a
result, the FDA and other regulatory agencies may apply new standards for
safety, manufacturing, packaging and distribution of drugs using this mode of
administration, including Macugen. We are working with the FDA in connection
with its development of appropriate standards for drugs using this mode of
administration. As part of this process, we also support efforts by the United
States Pharmacopoeia, which works with the FDA to establish standards, to
devise a particulate limit and a standard to measure particulate matter
appropriate for ophthalmologic treatments administered as ultra low-volume
injectables. It may be time consuming or expensive for us to comply with these
standards. This could result in delays in our obtaining marketing approval for
Macugen, or possibly preclude us from obtaining such approval. This could also
increase our commercialization costs, possibly materially. Furthermore, Macugen and any of our future products may not be effective,
may be only moderately effective or may prove to have undesirable or unintended
side effects, toxicities or other characteristics that may preclude our
obtaining regulatory approval or prevent or limit commercial use, which could
have a material adverse effect on our business. The FDA and other regulatory
authorities may not approve any product that we develop. The fast track designation for development of Macugen may not actually lead
to a faster development or regulatory review or approval process. If a drug is intended for the treatment of a serious or life-threatening
condition and the drug demonstrates the potential to address unmet medical
needs for this condition, the drug sponsor may apply for FDA fast track
designation. The fast track classification does not apply to the product alone,
but applies to the combination of the product and the specific indication or
indications for which it is being studied. The FDAs fast track programs are
designed to facilitate the clinical development and evaluation of the drugs
safety and efficacy for the fast track indication or indications. Marketing
applications filed by sponsors of products in fast track development may
qualify for expedited review under policies or procedures offered by the FDA,
but the fast track designation does not assure such qualification. We have
obtained a fast track designation from the FDA for Macugen for the treatment of
both wet AMD and DME. We have also received priority review status for our NDA
for wet AMD and have been entered into the Pilot 1 program, which allows the
FDA to complete reviews of individual reviewable units within six months of
submission and provide early feedback on the pre-submissions. Also, the FDAs
Dermatologic and Ophthalmic Drugs Advisory Committee will review our NDA
with respect to the use of Macugen in the treatment of wet
AMD on August 27, 2004. However, we may not continue to experience a
faster development process, review or approval compared to conventional FDA
procedures. Further, our fast track designation with respect to DME may be
withdrawn by the FDA if it believes that the designation is no longer supported
by data from our clinical development program. Our products could be subject to restrictions or withdrawal from the market and
we may be subject to penalties if we fail to comply with regulatory
requirements, or if we experience unanticipated problems with our products,
when and if any of them are approved. Any product for which we obtain marketing approval, along with the
manufacturing processes, post-approval clinical data, advertising and
promotional activities for such product, will be subject to continual
requirements, review and periodic inspections by the FDA and other regulatory
bodies. Even if regulatory approval of a product is granted, the approval may
be subject to limitations on the indicated uses for which the product may be
marketed or to the conditions of approval, or contain requirements for costly
post-marketing testing and surveillance to monitor the safety or efficacy of
the product. Later discovery of previously unknown problems with our products,
manufacturer or manufacturing processes, or failure to comply with regulatory
requirements, may result in: 29




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
    
    restrictions on such products or manufacturing processes;  
    
    withdrawal of the products from the market;  
    
    voluntary or mandatory recall;  
    
    fines;  
    
    suspension of regulatory approvals;  
    
    product seizure; and  
    
    injunctions or the imposition of civil or criminal penalties. We may be slow to adapt, or we may never adapt, to changes in existing
regulatory requirements or adoption of new regulatory requirements or policies. Failure to obtain regulatory approval in foreign jurisdictions would prevent us
from marketing our products abroad. We intend to have our products marketed outside the United States. In
order to market our products in the European Union and many other non-U.S.
jurisdictions, we must obtain separate regulatory approvals and comply with
numerous and varying regulatory requirements. In the case of Macugen, Pfizer
has responsibility to obtain regulatory approvals outside the United States,
and we will depend on Pfizer to obtain these approvals. The approval procedure
varies among countries and can involve additional testing. The time required to
obtain approval may differ from that required to obtain FDA approval. The
foreign regulatory approval process may include all of the risks associated
with obtaining FDA approval. We may not obtain foreign regulatory approvals on
a timely basis, if at all. Approval by the FDA does not ensure approval by
regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in
other foreign countries or by the FDA. We and our collaborators may not be able
to file for regulatory approvals and may not receive necessary approvals to
commercialize our products in any market. The failure to obtain these approvals
could materially adversely affect our business, financial condition and results
of operations. We have only limited experience in regulatory affairs, and some of our products
may be based on new technologies. These factors may affect our ability or the
time we require to obtain necessary regulatory approvals. We have only limited experience as a company in filing and prosecuting the
applications necessary to gain regulatory approvals. Moreover, some of the
products that are likely to result from our product development, licensing and
acquisition programs may be based on new technologies that have not been
extensively tested in humans. The regulatory requirements governing these types
of products may be less well defined or more rigorous than for conventional
products. As a result, we may experience a longer regulatory review in
connection with obtaining regulatory approvals of any products that we develop,
license or acquire. Risks Relating to Intellectual Property If we are unable to obtain and maintain protection for the intellectual
property incorporated into our products, the value of our technology and
products will be adversely affected. Our success will depend in large part on our ability or the ability of our
licensors to obtain and maintain protection in the United States and other
countries for the intellectual property incorporated into our products. The
patent situation in the field of biotechnology and pharmaceuticals generally is
highly uncertain and involves complex legal and scientific questions. Neither
we nor our licensors may be able to obtain additional issued patents relating
to our technology. Even if issued, patents may be challenged, narrowed,
invalidated, or circumvented, which could limit our ability to stop competitors
from marketing similar products or limit the length of term of patent
protection we may have for our products. In addition, our patents and our
licensors patents also may not afford us protection against competitors with
similar technology. Because patent applications in the United States and many
foreign jurisdictions are typically not published until 18 months after filing,
or in some cases not at all, and because publications of discoveries in the
scientific literature often lag behind actual discoveries, neither we nor our
licensors can be certain that we or they were the first to make the inventions
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applications, or that we or they
were the first to file for protection of the inventions set forth in these
patent applications. If we fail to comply with our obligations in the agreements under which we
license development or commercialization rights to products or technology from
third parties, we could lose license rights that are important to our business. We are a party to a number of technology licenses that are important to
our business and expect to enter into additional licenses in the future. For
example, we hold licenses from Gilead, Nektar Therapeutics and Isis
Pharmaceuticals under patents relating to Macugen. These licenses impose
various commercialization, milestone payment, royalty, insurance, and other
obligations on us. If we fail to comply with these obligations, the licensor
may have the right to terminate the license, in which event we would not be
able to market products, such as Macugen, that may be covered by the license. If we are unable to protect the confidentiality of our proprietary information
and know-how, the value of our technology and products could be adversely
affected. In addition to patented technology, we rely upon unpatented proprietary
technology, processes, and know-how. We seek to protect this information in
part by confidentiality agreements with our employees, consultants and third
parties. These agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors. Third parties may own or control patents or patent applications that would be
infringed by our technologies, drug targets or potential products. This could
cause us to become involved in expensive patent litigation or other
proceedings, which could result in our incurring substantial costs and expenses
and liability for damages. This could also require us to seek licenses, which
could increase our development and commercialization costs. In either case,
this could require us to stop some of our development and commercialization
efforts. We may not have rights under some patents or patent applications that
would be infringed by technologies that we use in our research, drug targets
that we select or product candidates that we seek to develop and commercialize.
Third parties may own or control these patents and patent applications in the
United States and abroad. These third parties could bring claims against us or
our collaborators that would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial damages. Further, if a
patent infringement suit were brought against us or our collaborators, we or
they could be forced to stop or delay research, development, manufacturing or
sales of the product or product candidate that is the subject of the suit. As a result of patent infringement claims, or in order to avoid potential
claims, we or our collaborators may choose
to seek, or be required to seek, a license from the third party and would
most likely be required to pay license fees or royalties or both. These
licenses may not be available on acceptable terms, or at all. Even if we or our
collaborators were able to obtain a license, the rights may be nonexclusive,
which would give our competitors access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product, or be forced
to cease some aspect of our business operations if, as a result of actual or
threatened patent infringement claims, we or our collaborators are unable to
enter into licenses on acceptable terms. This could harm our business
significantly. There has been substantial litigation and other proceedings regarding the
patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. In addition to infringement claims against us, we may
become a party to other patent litigation and other proceedings, including
interference proceedings declared by the United States Patent and Trademark
Office and opposition proceedings in the European Patent Office, regarding
intellectual property rights with respect to our products and technology. The
cost to us of any patent litigation or other proceeding, even if resolved in
our favor, could be substantial. Some of our competitors may be able to sustain
the costs of such litigation or proceedings more effectively than we can
because of their substantially greater financial resources. Uncertainties
resulting from the initiation and continuation of patent litigation or other
proceedings could have a material adverse effect on our ability to compete in
the marketplace. Patent litigation and other proceedings may also absorb
significant management time. 31




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Risks Relating to Our Financial Results and Need for Financing We have a limited operating history and have incurred losses since inception.
If we do not generate significant revenues, we will not be able to achieve
profitability. We have no current source of product revenue. We have a limited operating
history and have not yet commercialized any products. To date, we have focused
primarily on the development of Macugen. We began operations in 2000, and we
have not been profitable in any quarter since inception. As of June 30, 2004,
we had an accumulated deficit of approximately $184.3 million. We expect to
increase our spending significantly as we continue to expand our
infrastructure, development programs and commercialization activities. As a
result, we will need to generate significant revenues to pay these costs and
achieve profitability. We do not know whether or when we will become profitable
because of the significant uncertainties with respect to our ability to
generate revenues from the sale of our products and from our existing and
potential future collaborations. We may need additional financing, which may be difficult to obtain. Our failure
to obtain necessary financing or doing so on unattractive terms could adversely
affect our development programs and other operations. We will require substantial funds to conduct development, including
preclinical testing and clinical trials, of our potential products. We will
also require substantial funds to meet our obligations to our licensors and
maximize the prospective benefits to us from our licensors, and manufacture and
market products that are approved for commercial sale in the future, including
Macugen. We currently believe that our available cash, cash equivalents and
marketable securities, expected milestone payments and reimbursements from
Pfizer under our collaboration and interest income will be sufficient to fund
our anticipated levels of operations through at least the end of 2005. However,
our future capital requirements will depend on many factors, including:  
    
    the success of our collaboration with Pfizer to develop and commercialize Macugen;
    
    the scope and results of our clinical trials;
    
    advancement of other product candidates into development;
    
    potential acquisition or in-licensing of other products or technologies;
    
    the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
    
    the cost of manufacturing activities;
    
    the cost of commercialization activities, including product marketing, sales and distribution;
    
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other
patent-related costs, including litigation costs and the results of such litigation;
    
    our ability to establish and maintain additional collaborative arrangements. Additional financing may not be available to us when we need it or it may not
be available on favorable terms. If we are unable to obtain adequate financing
on a timely basis, we may be required to significantly curtail one or more of
our development, licensing or acquisition programs. We could be required to
seek funds through arrangements with collaborators or others that may require
us to relinquish rights to some of our technologies, product candidates or
products that we would otherwise pursue on our own. If we raise additional
funds by issuing equity securities, our then-existing stockholders will
experience dilution and the terms of any new equity securities may have
preferences over our common stock. General Company Related Risks  Our executive officers, directors and major stockholders will maintain the
ability to control all matters submitted to stockholders for approval. Our executive officers, directors and stockholders who own more than 5% of
our outstanding common stock, in the aggregate, beneficially owned shares
representing approximately 58% of our capital stock as of June 30, 2004. As a
result, if these stockholders were to choose to act together, they would be
able to control all matters submitted to our stockholders for approval, as well
as our management and affairs. For example, these persons, if they choose 32




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to
act together, will control the election of directors and approval of any
merger, consolidation or sale of all or substantially all of our assets. This
concentration of voting power could delay or prevent an acquisition of our
company on terms that other stockholders may desire.  Provisions in our charter documents and under Delaware law may prevent or
frustrate attempts by our stockholders to change our management and hinder
efforts to acquire a controlling interest in us. Provisions of our corporate charter and bylaws may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may
consider favorable, including transactions in which you might otherwise receive
a premium for your shares. These provisions may also prevent or frustrate
attempts by our stockholders to replace or remove our management. These
provisions include:  
    
    a classified board of directors;
    
    limitations on the removal of directors;
    
    advance notice requirements for stockholder proposals and nominations;
    
    the inability of stockholders to act by written consent or to call special meetings; and
    
    the ability of our board of directors to designate the terms of and
issue new series of preferred stock without stockholder approval. The affirmative vote of the holders of at least 75% of our shares of
capital stock entitled to vote is necessary to amend or repeal the above
provisions of our certificate of incorporation. In addition, absent approval of
our board of directors, our bylaws may only be amended or repealed by the
affirmative vote of the holders of at least 75% of our shares of capital stock
entitled to vote. In addition, Section 203 of the Delaware General Corporation Law prohibits
a publicly held Delaware corporation from engaging in a business combination
with an interested stockholder, generally a person which together with its
affiliates owns or within the last three years has owned 15% of our voting
stock, for a period of three years after the date of the transaction in which
the person became an interested stockholder, unless the business combination is
approved in a prescribed manner. Accordingly, Section 203 may discourage, delay
or prevent a change in control of our company.  If our stock price is volatile, purchasers of our common stock could incur
substantial losses. Our stock price is likely to be volatile. The stock market in general and
the market for biotechnology companies in particular have experienced extreme
volatility that has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors may not be able
to sell their common stock at or above their respective purchase prices. The
market price for our common stock may be influenced by many factors, including:  
    
    results of our clinical trials or those of our competitors;
    
    the regulatory status of Macugen and our other potential products;
    
    failure of any of our product candidates, if approved, to achieve commercial success;
    
    developments concerning our collaborators, including Pfizer;
    
    regulatory developments in, and outside of, the United States;
    
    developments or disputes concerning patents or other proprietary rights;
    
    our ability to manufacture products to commercial standards;
    
    public concern over our drugs;
    
    litigation;
    
    the departure of key personnel;
    
    future sales of our common stock;
    
    variations in our financial results or those of companies that are perceived to be similar to us;
    
    changes in the structure of healthcare payment systems; 33




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
    
    investors perceptions of us; and
    
    general economic, industry and market conditions.  If there are substantial sales of our common stock, our stock price could
decline. If our existing stockholders sell a large number of shares of our common
stock or the public market perceives that existing stockholders might sell
shares of common stock, the market price of our common stock could decline
significantly. All of the shares sold in our initial public offering in January
2004 and secondary public offering in May 2004 are freely tradable without
restriction or further registration under the federal securities laws, unless
purchased by our affiliates as that term is defined in Rule 144 under the
Securities Act. Substantially all other shares of our common stock are saleable
under Rule 144 under the Securities Act, including approximately 13.6 million
shares that will not be eligible for sale until expiration of lock-up
agreements from our secondary offering on August 26, 2004. Substantially all
of such restricted securities have rights with respect to the registration of
the sale of their shares of common stock with the Securities and Exchange
Commission. We have registered approximately 9,543,000 shares of common stock that are
authorized for issuance under our stock plans. As of June 30, 2004, 6,064,824
shares were subject to outstanding options, 4,445,059 of which were immediately
exercisable, but with respect to which we had the right to repurchase at the
initial exercise price all but 2,069,712 of the shares issuable upon exercise
of these options. Because they are registered, the shares authorized for
issuance under our stock plans can be freely sold in the public market upon
issuance, subject to our repurchase rights and the restrictions imposed on our
affiliates under Rule 144. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our exposure to market risk is confined to our cash, cash equivalents and
marketable securities. We invest in high-quality financial instruments,
primarily money market funds, federal agency notes, asset backed securities,
corporate debt securities and United States treasury notes, with the effective
duration of the portfolio less than nine months and no security with an
effective duration in excess of two years, which we believe are subject to
limited credit risk. We currently do not hedge interest rate exposure. Due to
the short-term nature of our investments, we do not believe that we have any
material exposure to interest rate risk arising from our investments. Most of our transactions are conducted in United States dollars, although
we do have some development and commercialization agreements with vendors
located outside the United States. Transactions under certain of these
agreements are conducted in United States dollars, subject to adjustment based
on significant fluctuations in currency exchange rates. Transactions under
certain other of these agreements are conducted in the local foreign currency.
If the exchange rate undergoes a change of 10%, we do not believe that it would
have a material impact on our results of operations or cash flows. 
 Item 4. Controls and Procedures. Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and regulations.
Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including our chief
executive officer and chief financial officer as appropriate, to allow timely
decisions regarding disclosure. As required by Rule 13a-15 under the Exchange Act, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. This evaluation was carried out under the supervision and with
the participation of our management, including our chief executive officer and
our chief financial officer. Based on that evaluation, these officers have
concluded that, as of June 30, 2004, our disclosure controls and procedures
were adequate and designed to ensure that material information relating to us
would be made known to them by others. There have been 34




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no changes in our
internal controls over financial reporting (as defined in Rules 13a-15(b) and
15(d)-15(f) under the Exchange Act) or in other factors that has materially
affected or is reasonably likely to materially affect internal controls over
financial reporting. 35




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings. We are currently not a party to any material legal proceedings. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission to a Vote of Security Holders. At our annual meeting of stockholders held on May 12, 2004, the following
proposals were adopted by the vote specified below:  a.
    
    Election of Class I directors for a term of three years: Director
    
    For
    
    WithheldJohn P. McLaughlin
    
    
    21,945,951
    
    
    
    2,399,371Srinivas Akkaraju, M.D., Ph.D
    
    
    24,147,537
    
    
    
    101,675Michael G. Mullen, CFA
    
    
    24,139,436
    
    
    
    205,886
 The following directors did not stand for reelection at our annual meeting
of stockholders as their terms in office continued after the Annual Meeting:
Samir Patel, M.D., Edward Penoet, Ph.D., Damion E. Wicker, M.D., David R.
Guyer, M.D., Marty Glick and Henry Simon.  b.
    
    Ratification of the selection of Ernst & Young LLP as our independent auditors for 2004: For
    
    Against
    
    Abstain24,137,506
    
    
    190,547
    
    
    
    17,269
 
 Item 5. Other Information. None 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits: Exhibit No.
    
    Description10.1
    
    Lease Agreement dated as of May 13, 2004 between ARE-35 Hartwell Avenue,
LLC and the Registrant
 36




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Exhibit No.
    
    Description31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer32.1
    
    Rule 1350 Certification of Chief Executive Officer32.2
    
    Rule 1350 Certification of Chief Financial Officer
  (b)
    
    Reports on Form 8-K: (i) On May 3, 2004, we filed a Form 8-K dated May 3, 2004, furnishing
under Item 5 Other Events Eyetechs press release announcing information
regarding Phase 2 clinical trials results for the use of Macugen in the
treatment of diabetic macular edema and Item 12 Results of Operations and
Financial Condition Eyetechs press release announcing financial results for
the three months ended March 31, 2004. (ii) On May 13, 2004, we filed a Form 8-K dated May 13, 2004, furnishing
under Item 5 Other Events a press release announcing the filing of a
registration statement in connection with a proposed secondary offering of
selling stockholders. (iii) On May 26, 2004, we filed a Form 8-K dated May 26, 2004, furnishing
under Item 5 Other Events Eyetechs press release with respect to the U.S.
Food and Drug Administration announcement about an advisory committee meeting
date for Macugen. (iv) On May 27, 2004, we filed a Form 8-K dated May 26, 2004, furnishing
under Item 5 Other Events Eyetechs press release announcing a secondary
offering of selling stockholders. (v) On June 3, 2004, we filed a Form 8-K dated June 2, 2004, furnishing
under Item 5 Other Events Eyetechs press release announcing the closing of a
secondary offering of selling stockholders. (vi) On June 16, 2004, we filed a Form 8-K dated June 15, 2004, furnishing
under Item 5 Other Events Eyetechs press release announcing the appointment
of Phillip M. Satow as a member of Eyetechs Board of Directors and the
resignation of Michael G. Mullen from the Board. (vi) On June 17, 2004, we filed a Form 8-K dated June 17, 2004, furnishing
under Item 5 Other Events Eyetech and Pfizer Inc.s press release announcing
the completion of filing of a New Drug Application with the U.S. Food and Drug
Administration for Macugen as a treatment for wet age-related macular
degeneration. (vii) On June 18, 2004, we filed a Form 8-K dated June 18, 2004,
furnishing under Item 5 Other Events Eyetechs press release announcing the
appointment of Michael J. Regan as a member of Eyetechs Board of Directors. 37




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SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized. EYETECH PHARMACEUTICALS, INC.(Registrant)Dated: August 13, 2004
    
    By:
    
    /s/ DAVID R. GUYERDavid R. Guyer, M.D.Chief Executive OfficerBy:
    
    /s/ GLENN P. SBLENDORIOGlenn P. SblendorioChief Financial Officer
 38




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EXHIBIT INDEX Exhibit No.
    
    Description10.1
    
    Lease Agreement dated as of May 13, 2004 between ARE-35 Hartwell Avenue,
LLC and the Registrant31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer32.1
    
    Rule 1350 Certification of Chief Executive Officer32.2
    
    Rule 1350 Certification of Chief Financial Officer